With its introduction in 2009, the Tax-Free Savings Account (or TFSA) became an attractive new investment option for Canadians. But because TFSAs are so new to Canadians, many people have misinterpreted the rules regarding contribution limits and have unwittingly over contributed to their accounts.
The confusion stems from the fact that while the annual contribution limit is $5,000, TFSAs were described as offering “full flexibility to withdraw and re-contribute.”
According to the Globe and Mail, that led to thousands of people accidentally contributing too much to their TFSAs when, for example, they initially contributed $5,000, then withdrew $4,000 and later contributed another $4,000. In the eyes of the Canada Revenue Agency, that amounts to an overcontribution and is subject to a tax of 1 per cent of the highest excess TFSA amount in the month, for each month you are in an excess contribution position.
If you’ve reached the contribution limit and then withdraw funds, you must wait until the next year to re-contribute those funds without being subject to the 1 per cent tax.
If you would like to open a TFSA or have questions about your existing account, please contact the credit union. We’d be happy to help.