The Steps To Fixing Your TFSA Over-Contribution Penalty
If you have landed on this page because you have received a letter from Revenue Canada in the mail regarding an over-contribution penalty, don't sweat it too much - this problem is easy to fix.
Revenue Canada will charge a 1% PER MONTH penalty on TFSA over-contributions. This amount ONLY applies to the amount of your over-contribution and NOT the total amount of your TFSA contribution.
So, if your TFSA contribution limit for the year was $6,000 and you accidentally contributed $7,000, the 1% tax will only apply to the total amount of the over-contribution, which is $1,000.
When you get your "excess amount letter" in the mail, Revenue Canada will tell you how much you have over-contributed as well as the tax amount of tax that you owe as a result.
So, if you had an over-contribution of $1,000 for three months (let's say, October, November and December), you would owe:
$1,000 x 1% = $10 per month, times three months
= $30
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Now - how do you fix this situation?
If you agree with Revenue Canada's assessment, follow these steps:
1) Immediately remove the excess amount from your TFSA account (you might have to call your bank or broker to do this)
2) Fill out the RC243 form (Proposed Tax-Free Savings Account Return) that was included in the letter and return it to Revenue Canada.
3) Pay the outstanding amount at your financial institution.
If you don't agree with Revenue Canada's assessment, you will need to send them a letter pleading your case. There are cases in which they will waive or cancel the tax owed, and this usually occurs if a reasonable error was made.
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You can find out your TFSA contribution limit by either calling Revenue Canada or logging into your online Revenue Canada account.
The current annual contribution level is $6,000, plus any unused amounts from previous years, in addition to withdrawals, is carried over. You should always find out your maximum contribution limit before making a deposit into your TFSA account.
There is no error buffer with TFSAs, so please make sure that you contribute the proper amount, or else you will likely receive a letter from Revenue Canada.
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Revenue Canada isn't looking to make your life miserable with this letter - they simply want to make sure that people are following the rules.
Note: I am not a professional tax advisor - contact a professional if you have further questions.