Lisa’s story: Charged $1,240 for TFSA over-contribution

June 14 2010 by Ellen Roseman

Lisa will pay dearly for over-contributing to a tax-free savings account. She knew that up to $5,000 was free of tax, but thought she could deposit more. So, she moved $21,000 from her chequing account into her TFSA.

Now she has received a $1,240 tax bill for her excess contribution in 2009. And since the money stayed in the TFSA until May of this year, she’ll get a large tax bill next year too.

I’m aware of all the comments at my blog from those who did read the rules and refuse to absolve others who didn’t. Canadian Capitalist, a blog I usually admire, came out in favour of the onerous tax hits for everyone who made errors in the first year.

Still, I think there’s a fairness issue that I hope the Taxpayers’ Ombudsman will examine. Just look at the chronology.

The TFSA launch date was Jan. 1, 2009, but the Canada Revenue Agency didn’t start sending out tax assessments until June 1, 2010. This meant Canadians could make mistakes for 17 months before being told they owed 1 per cent a month on excess contributions.

Many people will have to pay tax on over-contributions for 2009 and for the first half of 2010 as well (until they make the needed adjustments).

Remember, too, that TFSA contributions are made with after-tax money. So, those being penalized are double-taxed — all to pursue a little tax-free income.

Check out the comments below from federal Finance and CRA sources, which help explain why the rules were written the way they were. Then, read Lisa’s story.

LS later told me a story (see her June 17 comment) that is similar to Lisa’s in many respects. Her tax bill is $1,230. She can’t afford to pay it and she’s contacting her MP.

If you’re upset, write to your MP and to finance minister Jim Flaherty. Say that the TFSA was marketed heavily by financial institutions that gave out misinformation and lacked safeguards against misuse.

Where were the verbal warnings and online alerts that could stop people from making errors?

I’m in favour of taxes when applied fairly. But this current enforcement effort, in my view, doesn’t pass the smell test.

64 comments

  1. Lisa

    Jun 14 2010

    This topic is so relevant and painful for me. Yesterday, I received a letter asking me to pay $1,240 in penalties for excess TFSA contributions.

    Last year, I transferred $21,000 from my chequing account to a newly open TFSA account and kept it there until May of this year. It’s money that I earned, saved and already paid taxes on by working hard all these years.

    When I opened this account, it was presented to me as better than a regular savings account, since it didn’t impose taxes on the income earned on the first $5,000.

    When my bank suggested to me to open this account, I didn’t even think it was related in anyway to the CRA – the name of the account was High Interest Tax Free Savings Account; it didn’t have the CRA name in it, and it was called a savings account.

    I am thinking to go to my bank and ask them why they allowed such transactions to happen. (I read in forums that some banks didn’t allow these types of transactions to go through the system by displaying warnings on the computer screen.) But I am afraid they will wave some documents in my face and say “didn’t you see the rules?,” as scammers often do.

    Before this, I kept my money in a chequing account. Because the interest in a savings account was so low and I had to pay income tax on it, I didn’t even bother to put my money into a regular savings account.

    Keeping the $21,000 in TFSA until May 2010 means that I will owe the government about $1,200 next year as well.

    The important thing is that the income I received from my $21,000 was about $200, because the bank interest was very low, approximately 1% for a year.

    In your article, you mildly described this as a a nasty surprise. To me, it sounds more as fraud at the government and banking level.

    I called Revenue Canada and they said to write an appeal. But something is telling me that it would not help, because I am not really proficient in writing appeals and not proficient in writing anything as important as this in such a short period of time. They require the response to be received until 30 of June.

    I have a child at home whom I need to feed and I lost a job last year. And now I have to give the government my own money?

    I am asking you to write more articles about this, emphasizing that government doesn’t care about the income made on TFSA contributions and charges more than 12 times the income amount that people make. This should not be happening in a country such as Canada.

    In addition, I have to send them my response within two weeks of receiving the letter. And what if I am outside of Canada, what if I am busy (which I am).

    So now do people need to rush back to Canada or stop taking care of important things to make this deadline given on such a short notice???

  2. A finance department official

    Jun 14 2010

    From the time the TFSA was introduced, the Government has been clear on the rules that govern them, including those regarding excess contributions.

    They were set out in Budget publications released on Feb. 26, 2008, and further explained on the Government’s TFSA web site (www.TFSA.gc.ca).

    Under these rules, withdrawals from a TFSA in a given year are not added back to the individual’s contribution room until the following year.

    TFSA holders can transfer funds between their TFSAs without penalty by instructing their financial institution to execute a direct transfer from one account to another.

    The ability to re-contribute withdrawals is a key feature in the success of the TFSA and its ability to be used for many different savings objectives over an individual’s lifetime.

    The requirement that re-contributions cannot be made until the following year is necessary to allow an individual’s annual contribution room to be determined in a simple manner.

    Contribution room is affected by various factors such as contributions, withdrawals, accumulations of unused TFSA room and indexation.

    Without such a rule, it would be very difficult to verify whether a given contribution is within the individual’s TFSA limit.

  3. Caitlin Workman, CRA spokeswoman

    Jun 14 2010

    Here are the answers to your questions.

    1) Why do TFSA contributors have to wait till the next year to replace withdrawn contributions?

    The legislation that enabled the federal government to launch the TFSA dictates that withdrawals made from an individual’s TFSA will be added back to that individual’s TFSA contribution room at the beginning of the following year.

    Consequently, in determining how much room you have at any time in the current year, current year distributions [called withdrawals] are not considered.

    The following link provides 2 examples of this scenario:

    http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/wthdrwls-eng.html

    2) Why are some TFSA transfers being taxed when they should not be taxed?

    As you know, the TFSA was set up so that Canadians could transfer funds directly from one of their TFSAs to another of their TFSAs without affecting their contribution room limit.

    However, if they withdraw funds from one TFSA and contribute those same funds to another TFSA, the transactions will affect their contribution room limit and they may be subject to tax on excess contributions.

    Some TFSA transfers are being taxed because the Agency is not made aware that they are “direct” transfers. The TFSA holder’s financial institution may have erroneously processed the transfer as a new contribution and filed the information to the Agency in this manner.

    People should contact their financial institution for them to confirm to CRA that these situations are in fact “direct” transfers.

    3) What advice can be given to those who are already over the limit for 2010?

    The CRA recommends that anyone who has already over contributed to their TFSA for 2010 withdraw the excess as soon as possible. Withdrawing the excess portion as soon as possible will reduce the amount of excess contribution tax payable in 2010.

    4) What number can people call to get advice from the CRA on this problem?

    Canadians can call the CRA Individual Income Tax Enquiries telephone number at 1-800-959-8281 for English enquiries and 1-800-959-7383 for French enquiries for general information on TFSA.

    Complete information on TFSA is also available on the CRA website at cra.gc.ca/tfsa, including many examples.

    Individuals should call their financial institutions to report any errors on the part of the bank relating to contributions, withdrawals and transfers.

  4. DB

    Jun 14 2010

    I’m another Canadian who was misled by the TFSA program. Here’s a letter I wrote to Jim Flaherty.

    Sunday, June 13, 2010

    Dear Mr. Flaherty,

    Like thousands of others, I have just received my TFSA penalty statement. When I received this letter, I did not understand it. I had to contact the 1-800 government number to have it explained to me.

    I was shocked at how easy it was to be misled. This was an honest mistake and I feel it is the government’s responsibility to clarify the process in the future and to resolve this current issue as soon as possible.

    In reviewing the invitation to sign up for TFSA online, all the benefits are listed. Of the 5 points listed, the 4th point “transfer your money at any time without tax penalty and use it for any purpose” applies to my situation.

    In addition, the only cautionary piece of information follows this list of benefits — “Contributions in excess of your personal contribution room will be subject to a 1% per month penalty tax.”

    I withdrew some money temporarily from my TFSA with the intention of putting the same amount back in before my year’s end to stay within the $5,000 limit.

    Nowhere do I find that one cannot do this on my bank’s online instructions. It appears that there are thousands of Canadians who have been caught by this issue. My penalty is $399.84.

    The Canadian citizen should not be adversely affected by ‘small print’. This is a new program that has wonderful benefits, but it appears that the small print penalty is paying for this program.

    The Toronto Star, Saturday June 12/10, has an article called “ Nasty surprise for savers dinged 1% on savings account deposits”. It tells the story of many more honest Canadians who were caught innocently by this program.

    A two-week period to pay does not allow time for people to come up with the money, or to argue the point without being in danger of more penalties.

    This penalty should be waived for the first year of this new program and the clarity of information corrected by all banks and through government advertising the TFSA program. Please respond. Thank you.

  5. Money Smarts Blog

    Jun 14 2010

    Lisa, you need to get in touch with your financial institution. You made a really dumb mistake, but they let you do it, even though they knew it was wrong.

    Show them the bill and demand that they pay it.

  6. Canadian Capitalist

    Jun 15 2010

    Hi Ellen: I did not say I was in favour of “onerous tax hits”. What I did say was that a blanket waiver of penalties for everyone would not be wise.

    Lisa’s case is clearly egregious, but even if a blanket waiver was made for everyone whose net contributions never exceeded $5,000, she may be out of luck.

    Her best bet would be to apply for a waiver of penalties by establishing that the liability arose as a result of reasonable error. She should also act immediately to withdraw the excess TFSA amount.

  7. JimE

    Jun 15 2010

    A couple of things. One, if you have a TFSA issue, contact your MP. You won’t be the first person he’s heard from on this.

    Have your MP write a letter to Minister Flaherty. My MP sent me a copy of the one he sent on behalf of his constituents.

    Secondly, I agree with Canadian Capitalist. A blanket waiver of fees for everyone does not make sense. There are always the folks that truly try to ‘push the limit’ on things like this to see what they can get away with… they should pay.

    But if someone can prove that they (or their financial institution) made an honest mistake, then there should be some leeway in assessing penalties. Mitigation is the key. If you can show that you at least tried to correct an honest mistake, then perhaps a one-time waiver makes sense.

    In Lisa’s case, however, I don’t see a potential waiver applying to her. This was not an “oops, the money went in, then came out, then went back in” deal. She clearly over-contributed $16,000. And whether it’s the bank’s fault or not, the onus was on her to understand the rules on contributing more than $5,000.

  8. Michael James

    Jun 15 2010

    There may be good reasons why TFSA withdrawals can’t be replaced until the next year, but I’m surprised at the poor attempts to explain this by the finance department official and CRA spokeswoman.

    The finance department official claims that the rule is needed to keep the TFSA room amount calculation simple.

    How hard is it to keep track of the net contribution? Much more information is needed to calculate the over-contribution tax amount under the existing rules.

    The CRA spokeswoman’s explanation amounts to saying that the reason is because that’s the rule.

    I assume that the real reason has something to do with encouraging longer-term thinking about savings.

    Why can’t people at the finance department and CRA articulate the reasons clearly?

  9. MA

    Jun 15 2010

    You know, Ellen, you do a great job of helping consumers out when they actually get screwed by a company saying one thing and then doing another (ie. Rogers, Bell, Dell, etc…) but these rules were laid out pretty early on (11 months before the TFSA launched).

    If this had come out 10 or 15 years ago, I’d sort of understand how consumers wouldn’t have full access to the information, but considering the number of avenues available for finding the information, it still rests on the consumers.

    Nowadays, you find FAQ’s, PDF documents, websites dedicated to the issue, even forums where you can go pose any question that you don’t fully comprehend.

    I believe you’ve written before about when investing/spending a substantial amount of money to ALWAYS EDUCATE YOURSELF on what you’re getting into.

    If these folks are willing to drop $5k+ without having a full understanding of the account, then the couple hundreds of dollars in fines (remember, the 1% is a fine on overcontributions) shouldn’t be that big of a deal anyways.

    Take for example DB up above. He highlights one of the main mistakes that people made when he said “transfer your money at any time without tax penalty and use it for any purpose.” Many consumers assumed this to also mean, “withdraw from your account and then you can deposit it back in later, as long as you don’t have a balance over $5k.” Again, these are wrongful assumptions.

    And although the 1% monthly fine is pretty harsh, it’s there to deter people from abusing the system. The fine was put in place because the wise investors found a loophole that the fine imposed on overcontributions was relatively small compared to the returns they could get from their investments.

    It would be all too easy for individuals to say they made a “mistake” and the penalty should be waived, when in fact they purposely abused the system and are trying to get away with it.

    It’s also not up to the institutions to keep track of your, I repeat, YOUR contribution limit. Personal responsibility has seemed to dip quite a bit due to this TFSA.

    I’d like to see at least one person come out and admit, “I didn’t read the rules and limitations for the account and I overcontributed. Although the penalty is large, I will accept this as a learning experience and try to educate those around me so that they don’t duplicate my errors.”

  10. Canadian Capitalist

    Jun 15 2010

    I don’t understand why the excess TFSA rule is legislated as it is today. But this again reminds me of the admonition to never ask a bureaucrat “why?”.

  11. Geoff

    Jun 15 2010

    I agree. Ignorantia juris non excusat seems the likely response here. In other words, if Lisa didn’t know how what a TFSA was or how it works, she should have investigated it further before investing.

    But I do agree that if I were her, I’d be taking a long hard look at the (former) financial institution I used to use.

  12. NormaK

    Jun 15 2010

    Yikes! I understand the TFSA parameters. I’ve delayed contributing for the first year in anticipation of program anomalies or changes.

    I’ve never been involved with a glitch-free roll-out of a new program. Have any of you? I’ve also never received 100% compliance without correction and coaching and fine-tuning and I’ve dealt with small populations, not the potential target base of all Canadians over 18 with a valid SIN.

    I’m just sayin’…………

  13. Michael James

    Jun 15 2010

    I’ve had quite a while to think about this fiasco, and I believe that too many people have been affected to argue that everyone should have known the rules.

    CRA should pick some dollar amount, such as $500, and declare that all tax amounts will be lowered by $500 (or reduced to zero if under $500). That would take the pressure off them because it would eliminate the tax for most people. The most egregious violations of the rules would still attract a tax.

    CRA should then start pounding on the financial institutions that didn’t properly protect their customers. This \pounding\ might have to be in the form of new laws that levy penalties on financial institutions whose customers rack up too many TFSA tax penalties.

  14. Shylock

    Jun 15 2010

    I have 2 questions:

    1. It’s clear that my money is double taxed. Isn’t that non-constitutional, and if it’s non-constitutional, shouldn’t that invalidate this tax law itself?

    2. I want to challenge this unfair tax, so what’s the best way? Sending T400a with a cheque or sending T400a without a cheque?

  15. Mike

    Jun 16 2010

    What I do not understand is why I am being taxed 1% of my alleged “over contribution,” rather than on the gains I should have made.

    My balance never exceeded $5,000 at any time, and so I made no illicit gains, only the paltry interest (less than $30) that I made during the 7 months I had money in my TFSA.

    I would rather be taxed 100% of the interest made on the TFSA than 1% of the “over contributions.” I bet most people would too. Heck, in most cases that I’ve heard of even 500% of the interest made would still be less than 1% of the “over contribution.”

    I also don’t understand why it is based on “contribution” rather than “balance.” If the penalty was applied to BALANCES in excess of $5, 000 it would still serve the purpose of deterring abuse, while failing to unfairly punish those who made honest mistakes by failing to follow transfer procedures, and those who were misled by their banks.

    Once again, if this penalty is intended to stop abuse of TFSAs, then why is it based on the money invested, rather than the money gained?

    As a closing remark, I would suggest that all the sharp-tongued individuals who assert that those who made mistakes should have read the rules, consider this:

    In many instances I have read (including my own), individuals were informed by their banking representatives (notoriously PC Financial) that TFSAs could be used in the same manner as other banking accounts.

    Therefore, we had no reason to further investigate the matter and believed that we did, in fact, know the rules.

    If you believe that individuals should always believe that they are being lied to and do the investigation for themselves, then I pity you.

  16. Michael Roseman

    Jun 16 2010

    1) She should pay the assessment and then fight it. I have seen too many people think they can get something reversed and then have collections all over them because it takes so long.

    2) I think she has a real issue with her bank if her facts are correct.

    3) Rather than trying to appeal, which will likely fail as she was offside, she should write a letter (plain English, not legal-ese) addressed to the Fairness Committee at her local tax services office http://www.cra-arc.gc.ca/cntct/tso-bsf-eng.html.

    This committee has the ability to look at circumstances and personal issues, not just pure compliance.

  17. Kim

    Jun 16 2010

    Here is one scenario.

    Some smart investors who see the loophole of the TFSA before this 1%/month penalty is introduced could do the following to max out their investment gains:

    Buy low stock A for say $5000, sell when it goes up by 2% in a few days/weeks, net gain: $100.

    Withdraw the $5000, redeposit it back.

    Do a similar thing again. Always buy low and sell at a profit rate of 2-3%.

    Over time, a possible $1200 could be made and it’s all tax-free, if no penalty mechanism is put into place.

  18. Potato

    Jun 16 2010

    I don’t know what to make of all this fuss.

    On the one hand, it was the first year of the TFSA, and people over-contributing to savings accounts with paltry interest were clearly doing so out of ignorance and not trying to out-earn the penalties, so perhaps there could be some leniency in the penalties assessed.

    On the other hand, it’s not that complicated an account. The contribution room was $5000 for everybody — the RRSP has a similar over-contribution penalty, but people seem to be able to track their contributions for that (and there everyone’s contribution is different!).

    Indeed, before each of my blog posts on the TFSA, I summed up the new account in just seventy words, which covered both the limit and the having to wait a year part:

    “You can contribute money to it ($5000 per year) to grow tax-free until you feel like taking it out. While the banks might charge a fee to withdraw, there’s no tax penalty (unlike an RRSP), and you can recontribute any withdrawls in later years so you don’t lose the tax shelter space (again, unlike RRSPs) so it’s a great account not only for retirement, but also for medium/long-term savings goals.”

    Other blogs and newspaper articles had similar summaries all through the introduction. I don’t know how people aren’t getting this.

  19. MA

    Jun 16 2010

    @ Mike. I’m guessing I’m the “sharp tongued individual” that you’re referring to. You even show in your post that you know what the difference between a contribution and an ending balance is…so where did the confusion arise after you read “a maximum of $5,000 can be contributed every year”?

    Kim outlined very accurately why it is not based on the ending balance. Additionally, you’d be making some sort of money on the investment, so that would also be included in the ending balance.

    Need another reason? It also discourages people from jumping bank to bank when they see a new TFSA with an interest rate a quarter of a percent higher than the one they get now.

    Another issue you should look at is the bank you’re dealing with, PCF. I too use PCF for my banking, but one of the things I realized the first time I talked to their customer service reps is that they aren’t the most reliable.

    Your first red flag should be that it’s a no-fee bank, so maybe the CSRs aren’t top of the line when it comes to knowledge on the issue. That’s just something that jumps out at me when thinking about how reliable their information is.

    Others have pointed out that they believe A LOT of people are getting dinged with the fines. I believe I saw that 3.1 million people opened a TFSA, whereas 70,000 were fined for overcontributions. That’s 2.25% of the TFSA population that got fined, so clearly the rules are very understandable for a majority of the population.

    Lastly, I have to congratulate LD on being the first person to admit making the mistake because he didn’t take the time to read all of the rules and regulations. Hopefully in time, more people will join him in taking responsibility for their own mistakes.

  20. SC

    Jun 16 2010

    That’s good info from the Chartered Accountant. But do we need to actually send the government the cheque by June 30th? Can we wait until after the CRA’s decision on our relief letter? Or should we do both and hope for the best?

    I guess CRA will issue us a credit/refund if they reverse their decision.

  21. Mike

    Jun 16 2010

    @MA

    I disagree with several things you’ve stated but since I’m short on time at the moment I’ll say only this for now:

    While only 2.25% may have been penalized you have no idea what percentage of those who opened TFSAs put in some amount equal to or less than $5000 and simply left it there. It’s just as easy not to understand the rules when you’re not doing anything to “break” them.

  22. Yilmaz

    Jun 17 2010

    I also was fined by Revenue Canada even though I never had over $5000 in my TFSA accounts. I used it like a regular checking account which was a mistake I found after I got the fine from the taxman. Since then I closed all my TFSA’s and will avoid it all cost.

  23. Shylock

    Jun 17 2010

    The CRA charged me $380 on the whooping $60 interest that I made on this account, although my average balance was less than $4000 and my balance never exceeded $5000.
    I calculated how much government of canada taxed me on this $5000 and I found that the total tax was 66%! that’s it, leaving one third for me and my familly (42% income tax then this 12% tfsa tax then another 12% hst when I spent this money)

  24. Stephanie

    Jun 17 2010

    I didn’t have any trouble with my TFSA, but I don’t agree with all the smug, self-congratulating blaming of people who were misinformed by their banks or advisors. We aren’t all finance students.

    There may be hope, however. See this: http://www.canadiancapitalist.com/apply-for-waiver-of-tfsa-over-contribution-penalties/

  25. MA

    Jun 18 2010

    Shylock, the fine is levied on your overcontributions, not just your ending balance.

    If it were based on the ending balance, individuals would be able to buy penny stocks, realize a short term gain, cash them in/withdraw the funds and reinvest, rinse and repeat for the whole year, while not paying any capital gains on the amount made (this example was given earlier on).

    I’d hate to see how people would have handled the TFSA if the government actually used difficult terms in their tax law for the TFSA. If terms like deemed disposition/capital gains/Part IV Tax/redemption of investments, etc… then it would be a little more difficult.

    As far as I can tell, most people understand what overcontribution/withdrawal/deposit/fine for overcontributions mean. It’s pretty clear and I don’t have a Finance degree.

  26. JC

    Jun 19 2010

    It seems to me that there are 3 camps in this mess…. or 6, depending how pedantic you want to be:

    1. Those that either understood completely or were just lucky.
    2. Those who didn’t understand or were misled by poor marketing/ignorance by Banks and the Government that came up with the plan.
    3. Those completely out to lunch or perhaps looking to cash in on what they see as a meal ticket.

    Where would someone get the idea that plunking 10’s of thousands of dollars in an account with a 5,000 contribution limit per person per year was okay – for any duration of time?

    There were those that were working the system early on, using the TFSA as part of a trading system through a brokerage like Waterhouse, where any gains were thought to far outweigh any penalties. The gov’t put the kibosh on that.

    I guess I fall into the first category. I read all the documentation I found about it.
    I did a transfer from one bank to another but thankfully let them take care of it.

  27. Nj

    Jun 21 2010

    Same problem…but even received a one time “sorry we gave you really, really bad advice fee” from a couple of my financial institutions – PC Financial wasn’t one of them.

    PAWEL – or Ellen – can I please get that original GOvernment PDF that was ranting and raving about this wonderful new product? It’s terrible! And I’m gathering my evidence…

    Thanks.
    Nj

  28. MA

    Jun 22 2010

    FS, you just shot your problem in the foot with this statement:
    “When replacing the money, there was a brief warning not to go over our maximum allowable contribution, but this did not concern us, as we knew our maximum to be $5,000 per year. Since we were returning the exact amount we withdrew, we were not concerned.”

    Maybe your letter should read something like:
    “Dear ING, thank you for providing a wonderful service to my husband and I for no fees. Unfortunately, due to my own incompetence, I couldn’t be bothered with the warning you gave me about having a maximum contribution room. Rather than take the time to educate myself on what a maximimum contribution room was, I simply assumed that it meant my balance could not exceed $5000. Because of my misunderstanding and inability to read into the details for this account, I, and my husband, have been penalized. I believe it is up to you, Mr ING, to spoon feed us useless customers and hold our hands while we make error after error when dealing with large sums of money. PS, you need to pay my fine!”

    I wish Ellen would actually weigh in on some of these complaints that are far fetched in terms of being everyone else’s fault, and let some of these people know to take responsibility.

  29. MA

    Jun 22 2010

    Ellen, I appreciate you taking the time to read through the comments and reply to my post. First off, I post on the site Redflagdeals every so often and we have had a very large debate over this issue, with multiple threads showing up in the Personal Finance forums.

    I know you have referenced the site a few times before (I think your Bloomex post) and there seems to be a strong base of users who have a fairly good knowledge of the issues around the TFSA.

    Mind you, the people that come and post about their problems, like the people who have posted here, are ignorant to the rules regarding the account. I get how tax laws can be confusing with all of the specific words they use to describe them. Heck, I even had a hard time comprehending them in my tax courses at university.

    But this program didn’t really have those difficult/confusing words that we see in most tax legislation. The key part of the TFSA is contribution and withdrawal, which seems to be where a majority of people start making assumptions. These assumptions led to people thinking that only the overall balance of the account is where the $5k limit is placed.

    As for the points you raised above:

    – I believe that the government provided ample resources for information regarding the TFSA. Sure, the penalty might be buried in fine print (when are penalties really advertised out loud with any company?), but the rules were clear cut. They clearly outlined how much you could deposit each year, and said that you would be penalized if you went over. I would think that if you see the word penalty or fine or fee, you might look a little further into the matter so that if a situation arises, it’s not a surprise to see that you are penalized.

    – I have sympathy for the people that were misled by their financial institutions’ lack of knowledge, which is tough when you rely on them to explain the rules and regulations. However, I don’t think the banks should be putting safeguards in place for the TFSA. It would simply be too much work to account for everyone and all of the different accounts they had at different institutions. Plus, after year one, different people will have different caps, depending on their age, how much interest/investment income/loss they made in year one, whether they withdrew any of their money…While year one may have been the easiest to take care of, it’s still a lot of unneccessary work if everyone had taken the time to understand the information in the first place.

    – This point goes back to people not taking the time to understand what they are investing in, and again making assumptions. The rule said that the withdrawals made during the current year could be deposited again in future years, so people assumed that there would be no consequences to redepositing in the current year. The way I see it, it’s sort of like if someone told you that you would die if you jumped off a bridge tomorrow, you would assume that you would survive jumping off a bridge today.

    So what are your proposals for solving the situations that have come up? I have been thinking for the past week of how to fairly assess the penalty and who to waive it for. In my opinion, the only people that should have the penalty waived are:

    a) those who tried to transfer from one institution to another, but had it counted as an overcontribution, and

    b) those who accidentally put in too much, but withdrew it within a reasonable timeframe (maybe two weeks to a month).

    As for the people who blame the institution for misleading them, I don’t think they should have the penalty waived, but maybe reduced to, say, twice the amount of interest they made as a penalty for not reading up on the facts themselves.

    Lastly, there’s the group of people who withdrew all their funds and deposited with another instution, trying to take advantage of an extra half percent interest. These folks should be penalized at full value (1% monthly) in my opinion.

    What about the situation for FS above? I was very critical of that situation in my previous post because that is a classic example of ignorance. “The warning didn’t concern me…” Would you give her and her husband leniency and waive the penalty for them, blaming it on the institution? Or would you throw the book at her, charging the full 1% a month penalty?

    I appreciate reading your blog, Ellen. It’s almost given me a heightened sense of paranoia for when I have to deal with Rogers or Bell or Direct Energy.

    Although my comments on this blog post have been harsh, I believe that they are warranted for most cases. It’s very easy to lay the blame on others, but not so easy to take the blame yourself.

  30. VF

    Jun 24 2010

    To MA, CRF charged me $300 for over-contributing to my TFSA last year. I only had three transactions total last year from and to my TFSA.

    I Opened account in March and deposited $5000. Withdraw $5000 in June due to family emergency. Deposited $5000 back to the account a week later in July. Yes, one hundred dollars per transaction.

    I thought I did a good job on keeping the best level of my TFSA and utilized the convenience of the “withdraw anytime without penalties and deposited back later” TFSA.

    I’ve talked to all my colleagues and friends, none of them who have TFSA got a letter from CRA but, none of them know that you can’t deposit money back to TFSA until next year once you withdraw money from TFSA and you’ve reach max $5000 contribution the same year. They thanked me for warning them.

    I am really surprised when our government said there are only 2.5% Canadians who got penalties. I think most others are just lucky that they never touched their TFSA once they opened the account last year or this year.

    You are right, I should’ve taken the tax course when I was in university, like you.

    And you call us ordinary working class people who work hard everyday and try to save nickels and dimes here and there to feed our family ignorance? That actually fits better of yourself.

  31. MA

    Jun 25 2010

    VF – CRA did not charge you $100 per transaction. They charged you 1% on your monthly overcontribution, which would be 6 months @ $5,000.

    You know, maybe you should take a university course on tax to learn what hard to understand tax laws actually are. Read up on Section 85 rollovers for a real tough tax law.

    The only thing you needed to know was the difference between a contribution limit and balance for the TFSA.

    University level tax knowledge isn’t necessary for that…reading/understanding the rules is.

  32. Jim

    Jun 25 2010

    The following information was just posted on the CRA website at

    http://www.cra-arc.gc.ca/whtsnw/tms/jntsttmnt-eng.html

    The Honourable Keith Ashfield, Minister of National Revenue, and theHonourable Jim Flaherty, Minister of Finance, issued the followingstatement today:

  33. LOLatMA

    Jun 25 2010

    Oh, I guess CRA does not have your spite attitude MA 🙂

    They see there is a problem…not the one you see though!

    Thank god for us all!

  34. ringo

    Jul 1 2010

    this whole thing is nonsense, when the government put a $5k limit on the account, well, then it means $5k not $21k or $30k. This to me is common sense, if you were allowed to put in any amount then there would be no limit specified. But as a wise old man once told me, there is no such thing as common sense, its obvious now. People need to start taking responsibilty for their own ignorance, the government is not here to hold your hand.

  35. Mo

    Jul 2 2010

    Okay, so if you put in $5K, then remove $2K, how much did you put in? According to my math, it would be $3K, right?

    Once you put back the $2K, then the total would once again be $5K. However, according to the government, your total is $7K.

    Guess there must be more than one definition of common sense.

  36. MA

    Jul 2 2010

    Mo, if you put in $5k and withdraw $2k, you have put in $5k. You’re still confusing what a contribution/deposit vs a balance (or even your net deposits). If you put in another $2k, then you’ve deposited/contributed $7k. Although your net deposits/balance shows $5k. Learn the terms bud.

    And as the saying goes, “Common sense is no longer common.”

  37. ringo

    Aug 3 2010

    Mo – $5k is $5k, I know a little hard to grasp but yes, it is still $5k. On the other hand, her situation was very basic, as she put in $21k right off the bat.

    You sealed the envelope too: lack of common sense.

  38. Roshan

    Apr 25 2011

    Those who are blaming the banks – it’s not the bank’s responsibility to let you know that you are over your limit. It is your responsibility to know how much you have contributed. Especially if you have more than one TFSA accounts at more than one bank.

    Stop blaming others and take owenership for your own mistakes.

  39. Andreas

    Sep 5 2011

    Sorry Roshan, but I disagree with your assessment. Here’s why:
    1- I believe that banks should be expected to act in the best interest of their clients, especially when it doesn’t affect their own bottom line. It would have been so easy for the banks to set up their online banking programs to raise red flags when overcontributions were being made. Just like Spellcheck in Word, it’s nice to know there’s a failsafe to highlight mistakes and facilitate their correction before any real damage (e.g., an unnecessary bill in the hundreds of dollars) is incurred.

    2-These penalties go against the very principle of the TFSA program, which is to encourage people to save their income. By swallowing up the fruit of our savings (and in some cases, the very trees that generated the fruit), the federal government is providing disincentive to save, and breeding cynicism to boot. Very short-sighted, in my opinion.

  40. Dio

    Nov 3 2011

    There are arguments for both cases. There are situations where it is the responsibility and fault of the individual and also the financial institution.

    I will use my brother as an example because I am currently filling out a form for an exemption for the 2011 year.

    He turned 18 in October 2010. We opened a TFSA with Canadian Tire Financial Services in December. The agent told us he has a $10,000 contribution limit and in 2011, a $15,000 limit.

    He informed her of his finances and she specifically advised him to put in the $8,000 he currently had in a savings account in the TFSA and in the new year to put in the additional $7,000 which he was owed by my parents.

    Now we paid the over contribution fee limit for 2010, as it was $30 and not worth the paperwork. But we are filing for an exemption for the 2011 year as the tax would be $550, where he only made $350 in interest up to this point.

    We were not even aware of this mistake until late August 2010, when the government sent out the forms.

    We have filled out a request for taxpayer relief, Schedule-A excess TFSA amount, and TFSA return for the 2011 year and provided the financial information for the 2011 year of the account.

    I even contacted CTFS, but they are claiming they do not provide contribution room. That may be true now, but I doubt they had the policies in December 2010, as my brother was misinformed.

    Now do you think my brother merits an exemption AND should the financial institution be held responsible here? It was clearly their misinformation that led to this. If I’m not mistaken, any financial advice provided by banks is their liability.

  41. Chris

    Dec 7 2012

    I understand the over contribution penalty of 1%/month, but what is stopping a wealthy person from over contributing to their TFSA?

    Let’s say $100K and making 3%/month interest, so their net profit is 2%. Is this something that people can take advantage of if they know they are making over 12%/year of interest off of a startup company?

    I can’t find any fine print that would prevent someone for doing this. Can you help?

  42. Norbert Kausen

    May 6 2013

    MA, you are truly a pompous ass! I had been very careful, or so I thought, with regard to the whole TFSA shindig! I had repeatedly asked my bank every time I was going to contribute what I could contribute and if I was in the clear to contribute.

    Turns out I was given a bum steer. My bank stopped sending paper statements or began to charge for them on top of our monthly fees!

    I got caught in this whole fiasco because of my naivety and trust that the banks were informing me correctly. I specifically asked them personally because I did not have the time to continuously follow everything…my time was at a premium!

    Perhaps you have the time to play with your accounts, but I certainly do not!

    I tend to agree that this clearly dissuades anyone who does not have vast amounts of money or time to follow every little aspect of this bogus tax-free scam.

    Yes, they penalize one on the principal that has already been taxed and NOT the interest accrued…it is an out and out deception by a government department!

    I did everything in good faith and got dinged mightily for an error that I had made a point of asking my financial advisor about! That is why they are financial advisors and why we pay fees to them!

  43. Lola

    May 21 2013

    Hi Ellen,

    just found your article after getting in trouble with this government instrument… this is insane.

    I was moving the same amount of $5,000 between 2 banks a couple of times due to the higher rate of return and all this time had the info on my CRA account that I can put $15,000 contribution (which I never had).

    I’ve received a letter from them that I had contributed $18,852.92 (total of each month’s highest excess amount for the year) !!! I WOULD LOVE TO HAVE SUCH AMOUNT OF MONEY. Now I have to pay interest of $188.53 on an amount that I never had in my entire life. This my monthly grocery amount.

    Totally shocked it could happen to me in Canada. I’m not smoking, not drinking and working hard for my money, so now I’ll NEVER trust any other scam programs again.

    Please let me know if you have any advice for me 🙁

  44. Natalie P

    May 27 2013

    Wow. I just got my $158 “bill” from the government and I am shocked after I have read all the stories above.

    Clearly, TFSA accounts are a scheme and are, in fact, very dangerous for regular Canadians.

    To address many people above who said “you should have been smarter and knew better,” are you saying that if a person is uneducated or is overworked or too busy due to other issues in their lives, IT’S OK to make them pay hundreds and thousands of dollars as a penalty???

    This is pure discrimination. Government products should be foolproof for all Canadians.

    The dangerous part of the accounts is since it’s been 4 years now, many Canadians have accumulated larger amounts of money in these accounts. Most of them still do not understand the rules and can make mistakes.

    It hurts when you withdraw and deposit $5K into your account and pay a penalty. Imagine, if you have accumulated $25K over years and make the same mistake due to a failed real estate deal. And you find out 14 months later.

  45. Stanley

    Jun 3 2013

    My sympathies go out to all.

    My bank tried to convince me to go for the Tax Free Savings Account. When I started to fill out the form, I noticed there was no place to add in a beneficiary.

    When asked, the bank said it was a mere formality. No will and no beneficiary? Guess who gets the money? The banks and the CRA.

    More fine print and weird rules convinced me that this was a scam and I turned it down, flat out. The financial advisor at the bank acted insulted and couldn’t understand why I would turn down such a good deal.

    What a joke. At the interest rates banks are paying, taxed or not taxed, it amounts to essentially nothing.

    My relatives weren’t so lucky. This year, their bank let them over contribute to the TFSA and as a result, they will have to pay 20 times what little they made in the measly interest laughingly paid to them by the banks.

    The banks might as well set the interest rates to zero. Switch to a Credit Union – they would never let you over contribute and they are careful and respectful with your money.

  46. Wendy

    Aug 21 2013

    I opened a TFSA in 2009 and thought I could withdraw and deposit as long as the balance didn’t go over $5,000.

    I received a tax bill for over $100 and have since closed the TFSA.

    The government knew this would happen. They don’t do anything unless they’re making money.

  47. Joe

    Oct 12 2013

    I opened my first TFSA in January 2012. I deposited $20,000.

    I deposited $5,500 in January 2013. Yesterday, 22 months after opening my first TFSA, I received a letter from CRA saying that I overcontributed in 2012 by $775.58 and I owed about $93$ for 2012.

    They wrote that my contribution limit for 2012 was $19,224.42.

    I never had a TFSA before January 2012, so this is really confusing me. Is it possible that they’ve confused me with someone else?

    Could a different bank have sent my social insurance number to CRA by mistake for someone else’s $775 contribution prior to 2012? Has anyone heard of this happening?

    I’ll be phoning CRA as soon as the long weekend is over … but it’s so frustrating to have to wait to find out what’s gone wrong. And why on earth do they wait 22 months to notify me?

  1. » Round-up of financial blogs Canadian Business Blogs | Advice on Investment in Canada, Stock Market, Small Businesses Opportunities