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TFSA Part 1: Tax Penalties on Over-Contributions and Contributions While a Non-Resident of Canada

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When do you have to pay tax on your TFSA account?

The Tax-Free Savings Account (TFSA), which began in 2009, is a way for individuals who are 18 and older and who have a valid social insurance number to set money aside tax-free throughout their lifetime.

Contributions to a TFSA are not deductible for income tax purposes. That means that your contribution is counted as income and taxable. However, any amount contributed as well as any income earned in the account (for example, investment income and capital gains) is generally tax-free when it is withdrawn.  Administrative or other fees in relation to TFSA and any interest or money borrowed to contribute to a TFSA are not deductible. 

The total amount you can contribute to your TFSAs is based on your TFSA contribution room. While you are at least 18 years old and a Canadian resident, you accumulate TFSA contribution room each year, since 2009. This includes $5,000 of TFSA contribution room for 2009 to 2012, $5,500 for 2013 and 2014, $10,000 for 2015, $5,500 for 2016, 2017, 2018, and $6000 for 2019.

Tax payable on TFSAs

Generally, interest, dividends, or capital gains earned on investments in a TFSA are not taxable either while held in the account or when withdrawn.

tax on tfsa

There are, however, certain circumstances under which one or more taxes may be payable with respect to a TFSA: over-contribution and making contributions while a non-resident of Canada.

Over Contributions:

The penalty for making a “non-deliberate” over-contribution is 1% per month for each month the over-contribution remains in the TFSA. Deliberate over-contributions (where taxpayers clearly attempt to put in more than their limits to take advantage of tax-free income or growth) are also subject to a penalty of 100% of any income or gains resulting from the over-contribution; however, this 100% penalty is reduced by any amounts payable as a result of the 1% per month penalty applied on the same over contribution for the same year.

Non-Residents

If you are a non-resident and making contributions to your TFSA, then you must pay 1% per month to the CRA on contributions that were made while you are a non-resident.

The tax will continue to apply until whichever of the following happens first:

  • the contributions are withdrawn in full from the account and designated as a withdrawal of non-resident contributions; or
  • the individual becomes a resident of Canada.

An individual is not subject to the tax of 1% on non-resident contributions for the month in which the full amount of the contribution is withdrawn or, if applicable, the month in which Canadian residency is resumed.

Let’s look at a couple of examples.

Example 1

Gemma is 41 years of age and a Canadian resident. She opened a TFSA in 2014 and contributed $31,000 in that year. In February 2015, she contributed $49,000 and on September 7, she became a non-resident. On July 12, 2016, she contributed an additional $2,500 to her TFSA. By the end of 2016, Gemma was still a non-resident of Canada, and she had not made any withdrawals from her account.

For 2016, Gemma had to pay a tax on the contribution she made while she was a non-resident and she was also subject to tax on the excess TFSA amount in her account.

Gemma’s unused TFSA contribution room at the end of 2015 was $1,000 (the TFSA dollar limit of $10,000 for 2015 less her contribution of $49,000). Gemma was not entitled to the TFSA dollar limit of $5,500 for 2016 since she was a non-resident throughout that entire year. Gemma’s $2,500 contribution on July 12, 2016, resulted in an excess TFSA amount in her account at that time of $1,500. This is the amount by which her contribution exceeded her available room.

Gemma’s tax on non-resident contributions for 2016 was $150 because the full amount of her $2,500 contribution was made while she was a non-resident and it remained in her account until the end of the year. Since the tax is equal to 1% per month, the tax on her non-resident contributions was $150 ($2,500 × 1% × the 6 months from July to December 2016).

Since part of Gemma’s contribution while a non-resident also created an excess TFSA amount ($1,500, as described above) in her account, she also had to pay the 1% tax per month on this amount from July to December 2016. Her tax on her excess TFSA amounts was $90 ($1,500 × 1% × 6 months).

For 2016, Gemma had to pay a total tax of $240 on her TFSA, made up of $150 in tax on her non-resident contribution plus $90 in tax on her excess TFSA amount.

Gemma will not accumulate any room in 2017 unless she re-establishes Canadian residency in that year. She will have to withdraw the entire $2,500 she contributed while she was a non-resident to avoid an additional tax of 1% per month on the non-resident contributions as well as on the $1,500 excess TFSA amount.

Example 2

Hassan is 25 years of age and a resident of Canada, opened a TFSA in 2015. He contributed the maximum amount he could contribute in 2015 and 2016. His total contributions in 2017 were $1,000,00, and he made no withdrawals. Hassan became a non-resident of Canada on February 17, 2018. He contributed $3,000 to his TFSA on August 9, 2018. He re-established his Canadian residency for tax purposes on December 8, 2018.

Hassan’s unused TFSA contribution room at the end of 2017 was $4,500 (the $5,500 limit for that year less the $1,000 he contributed). Hassan also accumulated an additional $5,500 TFSA dollar limit for 2018. This is because this amount is not pro-rated in the year an individual becomes a non-resident, and he was considered a Canadian resident for part of 2018. This means that as of January 1, 2018, Hassan has a total TFSA contribution room of $10,000 (the $4,500 carried over from the end of 2017 plus the annual limit of $5,500 for 2018).

Even though he has an unused TFSA contribution room, a tax is applicable if any contributions are made while he was a non-resident. Since Hassan contributed $3,000 while he was a non-resident, he would have to pay a tax of 1% of this amount for each month from August to November 2018. He is not subject to tax for December as he re-established Canadian residency in that month.

Accordingly, Hassan had to pay $120 in tax based on his non-resident contribution ($3,000 × 1% × 4 months).

Reporting Requirements

Where one or more of TFSA taxes are applicable, a TFSA return must be filled out and sent by June 30 of the year following the calendar year in which the tax arose.

If you receive a TFSA excess amount letter and you have already removed the excess amount, you do not have to do anything else. If you have not removed the excess, it should be removed immediately.

If you agree with the information on the TFSA return, sign, date, and include your social insurance number, and submit it to the CRA. You can mail your return or make the payment electronically through you’re My Payment account, an electronic service that lets you make payments directly to the Canada Revenue Agency (CRA) using your bank access card.

If you do not agree with the TFSA return, contact a tax lawyer to prepare a letter to CRA with a detailed explanation as to why the tax liability arose and any additional documentation you may have as proof that your excess TFSA amount has been corrected.

Taxes are also payable on TFSA non-qualified investments, prohibited investments, as well as situations where the TFSA holder is provided with a tax advantage. Click here for part 2 of our TFSA series for this continuing discussion.

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Opening a TFSA is a simple process and is an excellent vehicle for shielding money from tax. However, there are some circumstances where taxes will need to be paid. You are well advised to contact a tax lawyer to provide counsel on your tax liability if you have a TFSA and are planning to become a non-resident or if you have exceeded your contribution limit.

If you are a TFSA holder, a lawyer at Kalfa Law is ready to provide you with expert guidance regarding your tax liabilities and how to get the most out of your TFSA.

You work hard for your money. We work hard for you to keep it™.

-Shira Kalfa, BA, JD, Partner and Founder

© Kalfa Law 2019

The above provides information of a general nature only. This does not constitute legal advice. All transactions or circumstances vary, and specified legal advice is required to meet your particular needs. If you have a legal question you should consult with a lawyer.

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