What is a Tax-Free Savings Account (TFSA) and what happens if you go over the annual limit?
In 2009, Ottawa introduced the Tax Free Savings Account (TFSA) and, if you'll allow for the slightest of hyperboles, made every Canadian smile. This was an amazing gift to us by our government. Ottawa was giving us a tax break. Whoa!
You could park your money and let it grow tax-free forever. If you were over the age of 18 in 2009 and a resident of Canada, you could have opened up a TFSA and put up to $5,000 into your TFSA. (Side note: please be aware non-residents of Canada are not eligible to open a TFSA. Fair game.)
If you have never contributed or opened a TFSA until today, you can contribute up to $52,000. Perplexed? No problem. The table below should make sense.
Year | Contribution Room |
2009 | $5000 |
2010 | $5000 |
2011 | $5000 |
2012 | $5000 |
2013 | $5500 |
2014 | $5500 |
2015 | $10,000 |
2016 | $5500 |
2017 | $5500 |
If you add up the amount of contribution room from 2009-2017, you will end up with $52, 000. You might have absorbed in 2015, you could have parked a juicy $10,000 into your TFSA as long as you were 18 in 2015.
Most Canadians are more familiar with their Registered Retirement Saving Plan (RRSP) account. Why would they not? RRSP was introduced back in the 1950’s to promote savings for retirement.
Sure, there are some similarities between a TFSA and a RRSP but there are several differences too. Both are savings account and can be used as an investing account where you can hold cash, GIC’s, mutual funds, index funds, stocks and bonds. Now, the biggest difference would be that unlike an RRSP, the contributions are not tax-deductible for TFSA.
So, you deposit after-tax cash into it, but you can withdraw it tax free. ANYTIME. Putting money in RRSP savings accounts gives a tax deduction when you deposit it, but you later pay tax on what you take out. Ugh.
What happens if you go over the annual limit?
You need to determine your TFSA contribution limit, which is comprised of your unused contribution room from prior years plus the limit for the current year. Again, if you have never contributed a single dollar (What’s wrong with you???), you should have no problem contributing up to $52,000.
Unfortunately, over-contributing to TFSAs has been a problem for several years. However, it is understandable. I partially blame the federal election. The Conservatives raised the contribution room to $10,000 in 2015—only for the Liberals to bring it down to $5,500 in 2016.
The other reason would be the misunderstanding of how withdrawals affect your contribution room. Sure, you can withdraw your TFSA money anytime of the year. Now, you need to understand, the withdrawals get added to your available TFSA contribution room the following calendar year. If you contribute the same year, chances are you might exceed your TFSA contribution limit.
Not the end of the world. If this is your first time, Canada Revenue Agency (CRA) will send you a warning letter. But, if you still fail to adhere to the letter, they are not afraid to charge you a penalty. Be wise and listen to the Tax Gods.
CRA does an excellent job of explaining your contributions towards TFSA.
Still unsure after that? Call the Canada Revenue Agency to clarify: 1 -800-959-8281.