Getting dinged on TFSA contributions

June 10 2010 by Ellen Roseman

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?

60 comments

  1. EyeBee

    May 24 2013

    I believe that it is the sole duty of the banker to advise clients about how the TFSA works.

    I do not believe the government intended to be tricky about it just so they can get your money. Terms were obviously not explained properly. I am a banker, so I know.

    Mistakes usually occur in the processing of the transactions, e.g. when funds are been transferred from one FI to another. The banker has to note that it is a transfer and not a new contribution.

    I have had to clean up one of these messes made by a colleague of mine and we (both I and the client) found CRA to be very helpful in helping to find out the problem and try to solve it.

    Give them a call if you are in such a situation and they will tell you what went wrong. You can go to your banker with that information and I am sure they will heppily help you out.

    The TFSA is a fantastic vehicle and I am in full support of it. It works well once you keep within the set limit.

  2. normand

    Jun 6 2013

    I was billed for $800 for the same reasons as everybody else. I have asked the CRA to review this. If they refuse, I think that they are nuts….

  3. Frank

    Jun 6 2013

    Note for ex-pat Americans living in Canada: Since the US requires you file a US tax return, even while living in Canada, you may be taxed on your TFSA. We were.

    The US doesn’t recognize it as a tax-free account.