TFSA overcontributions get thousands of Canadian taxpayers in trouble with CRA, new data show

The Canada Revenue Agency's national headquarters in Ottawa. Photo by Sean Kilpatrick/The Canadian Press files

Article content

Overcontributions to tax-free savings accounts (TFSA) continue to be a big problem for thousands of Canadians, as well as a source of increasing tax revenue for the Canada Revenue Agency (CRA) as it relentlessly pursues the collection of penalty tax in the courts.

Article content

As a reminder, if you accidentally overcontribute to your TFSA you will face the overcontribution penalty tax, which is equal to one per cent per month for each month you’re accidentally over the limit. You can request that the CRA waive or cancel the tax, which it has the power to do, if it can be established that the tax arose “as a consequence of a reasonable error” and the overcontribution is withdrawn from the TFSA “without delay.”

Article content

Article content

Article content

New data obtained by Investment Executive last month shows that the CRA assessed $166.2 million in TFSA overcontribution tax in 2024, up from $130.8 million in 2023. About 133,000 out of 19.3 million account holders were found to have overcontributed to their TFSA, with an average tax of $1,252 assessed per taxpayer. That compares with 117,000 overcontributors in 2023, with an average excess tax of $1,118.

Article content

Article content

Part of the reason so many taxpayers seem to be overcontributing can be attributed to a lack of understanding of the TFSA contribution limit. While that information can be found online using the CRA My Account access, it may not be up to date and may exclude recent contributions and withdrawals. For example, financial institutions only send TFSA transaction information for a given calendar year at the end of February of the following year. So, if you check your TFSA room online in the first few months of the year, you’ll be missing any TFSA contributions or withdrawals from the previous year (plus anything you did in the current year).

Article content

To this end, and as part of the CRA’s 100-day Service Improvement Plan, the CRA recently announced that the agency has been working to improve and simplify its web pages to make taxpayers’ experience with TFSAs “smoother and more efficient.” Its general TFSA web pages have been updated and now feature improved information on what a TFSA is, how to open one, what to think about before you contribute and how to make a withdrawal. The site also provides clearer step-by-step instructions to calculate how much you have contributed and more detailed explanations of what to do if you accidentally overcontribute.

Article content

Article content

The revamped CRA TFSA information site also now provides clear examples that illustrate how to calculate out your contribution limit, and has instructions on how to use the TFSA calculator available in your CRA account, as well as how to complete the TFSA contribution room worksheet.

Article content

Article content

But another problem that still needs to be addressed in the context of TFSA overcontributions is how to remove excess contributions if the fair market value of the investments inside your TFSA has plummeted to such an extent that it is below the value of the overcontribution you need to withdraw. This was addressed in a case I wrote about over the summer, where a federal judge called this a “perpetual tax trap” for the unfortunate taxpayer, adding that it “appears to be inconsistent with (Parliament’s) intent.”

Article content

This issue arose yet again in another recent TFSA overcontribution case decided in September. The taxpayer was assessed taxes, interest and penalties for overcontributions to his TFSA. At the same time, he experienced losses exceeding 90 per cent in his TFSA investments.

Article content

Between 2014 and 2022, the taxpayer contributed a cumulative amount of $286,500 to a self-directed TFSA account. However, owing to a pattern of unsuccessful investments, by 2022 he had suffered losses of $269,518, leaving his account balance almost entirely depleted. His excess contributions subject to overcontribution tax during this period totaled about $205,000.