Don’t inadvertently overcontribute to your TFSA or penalties may apply

If you withdraw money from your Tax-Free Savings Account (TFSA), you can recontribute the same amount, but beware: the contribution room is not increased until the beginning of the following year. Consider the following example:

Shirley contributed the maximum of $5,000 to her TFSA in January 2009 and then withdrew $4,000 in March 2009 to pay an unexpected bill. She contributed $4,000 to her TFSA in July 2009, but because she wasn’t eligible to recontribute the $4,000 until January 1, 2010, Shirley had an overcontribution of $4,000. Her penalty—1 % (of the $4,000) for each month in 2009 that the account was overcontributed (6 months x $40 = $240).

Because the TFSA program was new in 2009, the CRA has stated that it will review each situation on a case-by-case basis and, where appropriate, waive the penalty tax on excess contributions for the 2009 tax year. However, the CRA is less likely to waive penalties for 2010 and future years.

When transferring a TFSA account
A transfer of a TFSA account from either one institution to another or a transfer within a single institution within the same year should not be considered a new contribution. However, in some cases, the institution may have incorrectly reported the transfer as a new contribution for purposes of the information sent to the CRA. In such cases, amended records may have to be filed.