Friday, October 7, 2011

TFSA Over-contribution Nightmare

Are you one of the 1.5% of Canadian TFSA holders who "accidentally" over-contributed to your TFSA in 2010? If you recieved a letter about this from Revenue Canada in August, you have just 60 days from the date the letter was sent to make sure that you are not stuck paying for your ignorance of the TFSA rules.

It turns out, that you cannot transfer your TFSA from one institution to another without it being considered an over-contribution. Here's what happened to me.

Ignorance could cost me $1,100
Early in 2010 I decided to move my TFSA holdings from a savings account at one bank to an investment account at another. I did this myself without giving much thought to it. After all, it was just a transfer. Though I was maxed out on my contributions, I was not technically adding any more money to my TFSA. Wrong.

Any movement of cash out of you TFSA is considered a withdrawl. You cannot put money back into a TFSA account during the same fiscal year that you withdrew it. Once it's out, it has to stay out. You can top it up during the next fiscal year. If you do so before that, you will be charged 1% of the total of each month's highest excess amount for the year. My $10,000 "over-contribution" meant that I was charged 1% on $110.000, even though I had technically not added an extra $10,000 to my TFSA but had simply moved my money from one spot to another.

Fortunately, as you can see in a press release issued by Revenue Canada on August 19th, there is room for a pardon on this mistake as long as you respond within 60 days of the date of their letter. I had a late summer holiday and came back to a mountain of paperwork. I found my letter (dated August 18th) this week. I have to respond by October 18th and here's what I have to do.

Making your case
This is what Revenue Canada told me to do:
  1. Write a letter to Revenue Canada pleading your ignorance of the rules and asking them to please waive the penalty.
  2. On the one-page TFSA Return 2010 (form 0026301), fill in the "information about you box" and then sign the back at the bottom.
  3. Attach any bank paperwork that proves your innocent mistake.
  4. Put it all in the provided envelope and get it in the mail ASAP. I'm mailing mine today!

Copyright 2011. Laura Thomas. All Rights Reserved.
For reprint permission contact moneyme at telus dot net.

1 comment:

  1. I didn't get a letter, but I can imagine the nightmare. They made the program quite complicated!