My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. My posts are blunt, opinionated and even have a twist of humour/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

Monday, September 10, 2012

Canadians Continue to Break TFSA Rules -So Why not Help Them?

Last week it was widely reported by several media outlets that thousands of Canadians have once again broken the TFSA rules. More specifically, they have breached the over-contribution rules. Dean Beeby of the Canadian Press notes in this article that the Canada Revenue Agency (“CRA”) sent out 76,000 letters (down from the 103,000 letters last year) informing Canadians they have over-contributed to their TFSAs and are subject to penalties of 1% per month on the excess over-contribution (The CRA may waive a penalty if they consider there to be a genuine misunderstanding and the over-contribution is removed within a reasonable period of time).

Generally, I believe blame should start and stop with yourself. However, where thousands of people are making the same mistake, it is obvious the CRA and the institutions administering TFSAs are still not enunciating and communicating the rules clearly to Canadians, despite their good intentions in some cases.

In general, there are two ways over-contributions arise in a TFSA:

1. Individuals contribute an amount greater than their yearly contribution limit.

As described in this CRA document on TFSA contributions, your yearly TFSA contribution room is made up of the following: 
  •  your TFSA dollar limit ($5,000 per year plus indexation, if applicable);
  • any unused TFSA contribution room from the previous year; and
  • any withdrawals made from the TFSA in the previous year, excluding qualifying transfers or specified distributions.  

2. Withdrawn TFSA contributions are “put back” in the wrong year

As described in this CRA document, TFSA withdrawals can only be returned to your TFSA in the year after you have made a TFSA withdrawal. This is because in the contribution room formula noted above, your contribution room increases for any withdrawals made only in the previous year, not the current year.

For example: if you withdrew $3,000 from your TFSA in February, 2012 and you put back any portion of that $3,000 (assuming you have no other contribution room) at anytime in 2012, you will have over contributed in 2012. The over-contribution results because the $3,000 withdrawal should not be added to your contribution room until 2013.

So, after several years of thousands of Canadians misunderstanding the withdrawal rules for TFSAs, why doesn’t the CRA request, or financial institutions on their own volition, take the simple step of requiring its representatives to ask the following two questions before a TFSA contribution is accepted?

1. Have you confirmed your yearly TFSA contribution room to your income tax assessment or with the CRA through your online account or any other means?

2. Does your contribution include an amount put back on account of funds withdrawn during the current calendar year? If so, do you understand the current year withdrawal does not increase your contribution room until next year and unless you have other contribution room, you will have an over-contribution subject to penalties?

I would suggest that if these two simple common sense questions were mandatory questions financial institutions asked its customers before they made TFSA contributions, the CRA would have no need for 76,000 letters next year and taxpayers would have no one to blame, but themselves.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.


  1. I must admit I don't understand the reason behind the legislated "don't recontribute in the same year" rule.

    Surely all that is necessary is for the bank (or taxpayer) to keep a running total of all the contributions and withdrawals. The total this year cannot exceed 20K, and next year cannot exceed 25K.

    Maybe what we need is this simple change in the legislation.

    1. Hi Anon:

      That would be a simple solution. It would be interesting to know the reason behind the don't recontribute in the same year rule. I assume it is some back office information technology issue or the CRA feels there could be some abuse if it allowed same year withdrawls and re-contributions. But darned if I know.

  2. That would be a simple solution but I think depending on the activity within the TFSA, it may be hard to keep track of the principle portion contributed. The total can exceed 20k this year or 25k next year by the amount of gains realized. If one is very active investing within a TFSA, and also draws and re-contributes regularly, I think it will be more difficult to track the principle amount invested and also one of the reasons the CRA legislated that rule.

    1. Hi Anon, just answering another question when yours came in, so here is a quick response. Just to clarify, since I cannot tell if you realize this or not, it is not only the principal that can be recontributed, but the principal and investment earnings.

  3. I find it odd that when transferring a TFSA from one institution to another, if the Institution does a "Direct Transfer" it's OK with CRA, but if the Institution allows the individual who owns the TFSA to transfer the very same amount, it's considered an over-contribution.
    TFSAs have turned out to be a boon for CRA because they can tax the income twice!

    -Revenue Canada: putting the TAX back into Tax-Free Savings Accounts.

    1. Hi Anon- As someone who knocks the CRA on many occassions, I dont think it is fair to say they are looking to tax you twice. They have tried to communicate the rules as best they can. Where they can be criticized is that there still are almost a 100,000 people a year making the same mistake, so either get rid of the next year rule or ensure the financial institutions make people aware of the withdrawal and contribution rule when they make their contribution.

  4. Trouble is ... the "next year rule" was clearly spelled out when I looked at the CRA web site in Mar 2009. It was no later than 2010 when all of my financial institutions had put up warnings about "this is considered a contribution, make sure you have contribution room".

    From what I can tell ... it was clearly written up for a long time ... so I can only guess that people are jumping to conclusions or not paying attention.

    Secondly ... I am puzzled by why people want to keep track of all TFSA contribution room and all contributions. It is a dynamic number, just like figuring out how much money is left in one's chequing account.

    All one has to do is early in the new year - add to the running total the yearly TFSA contribution room and last year's withdrawals. After that - as long as one subtracts the contributions made from the running total, one will always know what's left.

    1. Hi Anon

      Most people are not as attentive as you. IMHO, the financial institutions need to specifically ask or warn the client before they make the contribution.