Have you ever discovered that you over-contributed to either your RRSP or TFSA? Then check out the commonly asked questions below to find out what you can do about it. Also check out the information below to help you determine if a TFSA is right for you.
Is it better to use a Tax Free Savings Account or just a regular savings account?
The TFSA allows for tax free earnings and withdrawals without penalty. It also allows you to invest in a number of different investment vehicles, including stocks, mutual funds, GICs and bonds (ask your financial institution). However, the TSFA only allows you a $5,000 annual contribution. You can invest as much as you want at any given time to a regular savings account. Other things you should know about TFSA’s:
- You must be 18 and have a valid SIN to open a TSFA
- The TSFA allows a maximum annual contribution of $5,000.
- There is a 1% over-contribution penalty for any amount over $5,000
- If you withdraw money from your TFSA you do not lose the contribution room, but it is carried over to the following year. For example: if you deposit $5,000 and withdraw $2,000 in the same calendar year, you have reached your limit even though there is only $3,000 in the account. Once the new calendar year starts, you receive another $5,000 in contribution limit plus the $2,000 withdrawal from the previous year for a total of $7,000.
I received a letter from CRA saying I over contributed to my TFSA. It was an honest mistake but now I’m facing penalties. What should I do?
Unfortunately, the TFSA is not meant to be a daily savings account with in and out activity. You can deposit any amount up to $5,000 but once you reach the limit, you are not allowed to put any more in for the year even if you have taken money out.
But you can appeal the penalty. You need to show that you made a reasonable error and you acted without delay to withdraw the full amount over contributed. You need to complete a Form RC4288 (http://www.cra-arc.gc.ca/E/pbg/tf/rc4288/README.html) – this is the same form used for requesting waivers of penalties and interest under the Taxpayer Relief Provisions. It should be sent with the RC243 and related schedule. The final decision will be up to Canada Revenue Agency.
What should I do if I accidently over contributed to my RRSP?
You can over-contribute to you RRSP $2,000 without penalty, If you have over-contributed by more than $2,000, you will be subject to a 1% penalty tax on the amount over $2,000. If the over-contribution was an honest mistake, you can withdraw the excess amount without being taxed on it as long as you do so within a certain time frame. You may also need to complete a T1-OVP (http://www.cra-arc.gc.ca/E/pbg/tf/t1-ovp/README.html) depending on your situation.
This is the end of the series of common tax questions for now. Thanks for reading, and I hope you have found this series helpful in understanding the Canadian tax system,
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