A three-way mix-up involving investors, their financial firms and the federal government has left 70,000 people with potential tax bills for over-contributing to their Tax-Free Savings Accounts.
Glitches are inevitable when a new savings program such as the TFSA is introduced, but this one involving over-contributions is a beaut. Because of a misunderstanding about the TFSA rules, people have received notices from Canada Revenue Agency informing them they may have to pay penalties, in some cases of several hundred dollars, on excess contributions to their plan.
The TFSA rulebook states that you can contribute a maximum $5,000 per year to a TFSA, and that you can take money out any time, tax-free. You can put the money back in, too, but the fine print here is key.
Most importantly, you have to wait until the next calendar year to put money back into a TFSA. So if you put in the annual maximum contribution of $5,000 in January, 2009, when TFSAs were introduced, and then withdrew $3,000 a few months later, the earliest you could have replaced that money without incurring a penalty was Jan. 1, 2010. Do it any earlier and you end up with an over-contribution, even if you remain under the $5,000 limit.
Another subtlety is that you can’t pull money out of a TFSA account and transfer it to a plan at another financial institution within the same year. Again, the amount going into the new plan is considered an over-contribution.
TFSAs are a great financial tool because you can invest or save with them and pay no tax on your gains. But they are not like savings accounts. You can’t cycle money in and out at will.
Blame the government for not making this as clear as it needed to be, blame individuals for not checking the details and blame financial institutions for not having any checks and balances in place to prevent this sort of thing.
