TFSA – A review
Some investors have been receiving notices of assessments from CRA to pay penalties on their Tax Free Savings Accounts (TFSA). I think it’s time for a quick review to make sure you are operating your accounts correctly so you can avoid any penalties.
First some basics.
The TFSA was introduced effective January 1 2009. All individuals (18 and older) have started accumulating TFSA room of $5,000 per year. If you do not use your room, it does accumulate and allow you to use it in the future. So those of us that still have debt to repay and not using TFSA yet, we now have $20,000 TFSA contribution room.
As the name indicates, any income earned in the account is tax free. No tax slip will be issued for any income earned. And you do not include it as income on your tax return.
Remember that you can open more than just a savings account for your TFSA. Some of my clients are using dividend mutual funds in their TFSA. A great way to earn better income (not guaranteed of course) for those who have experience with investing in stock mutual funds. Basically anything you can put in your RRSP you can put in your TFSA.
So how you can ensure you never pay any penalties on your TFSA?
First, it’s up to you to keep track of all your TFSA. CRA (Canada Revenue Agency) has been providing you information on your income tax Notice of Assessment after you file your tax return, but not all financial institutions have reported quickly enough so I’d suggest not relying on this information.
Some problems have occurred when an investor has TFSAs at more than one bank, credit union or other financial institution. Employees may suggest you open or add to your TFSA and if you have forgotten you already bought somewhere else, you may end up over your limit.
The penalty is 1% for each month you are over your limit. So if your TFSA contribution limit is $5000 and you buy two $5000 TFSA in January, your penalty is $50 per month until you withdraw it or until you create more TFSA room the following January. A hefty price to pay!
Also remember that if you withdraw from your TFSA, the amount of the withdrawal is added to your TFSA contribution room, but not until the following January. So unless you still have some contribution room, you cannot put it back in until January. Some people were operating their TFSA like a regular savings account: adding and withdrawing several times. That’s where you can get into trouble and end up over-contributing to your TFSA.
Remember that you can transfer your TFSA to another Financial Institution, but make sure it’s done as a proper transfer, don’t just withdraw it and deposit it somewhere else. Otherwise you may face a penalty. If you want to avoid some potential transfer out fees, then you can make the withdrawal in December and make the deposit in January so you don’t get caught with an over-contribution to your TFSA.
If you have received a notice of assessment from CRA about your TFSA and believe it’s an error, contact your financial institution(s) first and then contact CRA and explain. It’s possible one or more of your Financial Institutions have reported a deposit or withdrawal incorrectly.
That happened to one of my clients. It took several weeks to get corrected, but CRA did receive the amendment from the bank and did cancel the request of penalty from my client.
If you need help with a notice of assessment, give me a call and I can help you determine whether the penalty assessed is correct or not. Mistakes can happen, but if it’s correct, you will have to pay the penalty. Plus interest.
Anni Markmann is a Certified Financial Planner, a Certified Professional Consultant on Aging and Tax Expert living, working, and volunteering in our community. Contact her at 422-6631, firstname.lastname@example.org or 36 Dawson Road in Ste Anne.