I’m hearing from many people who are surprised to find they have to pay tax on contributions to a tax-free savings account.
If you withdraw money from a TFSA, you can replace it the next year without any tax consequences. But if you pay back what you withdrew from your TFSA in the same year, you’re making an overcontribution — and you have to pay 1 per cent of the amount to the Canada Revenue Agency.
There’s a pretty good explanation here. But because the TFSA is new, many of those complaining say they didn’t know how the rules worked.
Sometimes, it’s the financial institutions at fault. I heard from someone who transferred his TFSA from a TD Waterhouse brokerage account to a TD branch last year. The bank counted the transfer as a new contribution.
Check out the comments at this tax blog and the complaints I posted below. Have you been caught in the same trap?