Ahh the Tax Free Savings Account. So misunderstood, so lovely, and so useful. Such a great creation since 2009 because you can contribute up to $31,000 cumulatively if you haven't started contributing yet. However, often with great power comes great responsibility because the Tax Free Savings Account can act like a dual edged sword if you are not careful using it properly.
How can one not use the Tax Free Savings Account properly you might ask?
Well, as you know a few months ago I wrote a post (and I guess in a way personal finance blogger confession- you know, since personal finance bloggers never do wrong or make mistakes in the money/savings/tax savings realm haha) a few months ago about how I over contributed for my Tax Free Savings Account. You can read the whole dramatic story here and read about what steps I took to try and alleviate my situation. As mentioned in that post, I even nagged at people on my blog to make sure they do not over contribute to their TFSA because it is very easy to do. Then I go ahead and act like a hypocrite by over contributing. 🙂
Over contributions yield a big penalty. Lots of interest.
As a reminder, the Canada Revenue Agency charges 1% tax on over contributions of your Tax Free Savings Account.
Anyway to recap, this is what I did when I found out I over contributed. It took a bit of time on the phone and a lot of detective work.
1) Get that excess amount out of there as soon as possible (and Taxtips.ca concurs). The longer you have it in there the more penalty you get. Even if you have it in their for 3 days of that month, you are still dinged for that month.
2) Call the Canada Revenue Agency to Clarify 1-800-959-8281 and explain your situation (plead your case, whatever you want to call it)
3) Fill out that Over Contribution form, suck it up, and pay the amount (send a cheque) – you have to appease the Gods (CRA), they will reverse the amount if necessary.
4) Write a letter detailing your explanation and pleading your case. Also include the history of the contribution amounts from your account (printed out)
5) Cross your fingers and hope for the best. It will take at least 8 weeks for you to get a response from the Canada Revenue Agency
To be honest, I thought it was a lost cause and was ready to suck up the loss of almost $500 and another $400 or so for next year (since it took me a portion of 2014 to discover I had over contributed). Almost $1000 down the drain really sucks for a careless mistake. It didn't feel very good but there was nothing I could do because I did all that I could do.
Thank you Canada Revenue Agency!
Well much to my happiness, my dreams have been answered and I was very grateful when I got a letter from the TFSA Processing Unit.
I received my money that I sent back including a bit of interest (how fair is that!? Canada Revenue Agency, you are pretty cool). It said that after careful consideration they have decided to waive all or part of any tax imposed on excess TFSA contributions, thanks to the Income Tax Act (which allows the Canada Revenue Agency to decide whether or not to do this).
However, the Canada Revenue Agency did say that if the information available or that I provided changes in any way, they can change their decision to grant relief.
Needless to say, I am very grateful for their decision and am happy that I took the steps necessary (and quickly might I add) to reverse the damage that I had done. I will not do that again and it is a lesson learned to keep careful records of what you contribute to registered accounts! No one else will do it for you! (Well, maybe the nice people from the government can give you an updated list of your contribution room in your TFSA).
If you would like more information on Tax Free Savings Accounts, head to the Canada Revenue Agency website for more information.
Readers, how have you fared with your applications for appeal with regards to the Tax Free Savings Account over contributions?