Posted on September 29th, 2021 in Domestic Tax

TFSA: Excess Contributions

Asian boy hand inserting a fifty dollars bank note into white piggy bank against wooden grey background

Individuals who contribute excess amounts into their TFSA are subject to a penalty tax of 1%/month on the excess amount for each month that the TFSA is over-contributed. However, CRA has the discretion to waive this penalty tax if the excess amount resulted from reasonable error and the excess contribution, plus any income or capital gains reasonably attributable to them, is withdrawn without delay.

CRA recently considered whether relief on this penalty tax could be provided where the value of the TFSA had reduced to nil. They opined that, as the excess contribution could not be withdrawn without delay, they would not have the discretion to waive the penalty tax. As such, the penalty tax would continue to apply until the individual accumulated enough additional TFSA room to cover the excess contribution.

ACTION ITEM: Under the facts above, CRA does not believe they have the discretion to waive the penalty tax on an excess TFSA contribution. Even where they have that discretion, they often refuse to waive the tax. Care should be afforded to ensure not to make excess TFSA contributions, and if an error is made, it should be corrected as soon as possible. 

Article originally published in: Tax Tips & Traps 2021 Third Quarter – Issue 135