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Make sure that you over contribute to your TFSA! Know when to use a TFSA and when to use an RRSP to avoid getting a TFSA overcontribution penalty!

As you (my fellow Canucks) probably know by now, the Harper government introduced a new savings vehicle in 2009- the TFSA!  TFSA’s are great– they grow tax free (that’s a beautiful thing!) and you can withdraw money whenever the heck you want.

But can you re-invest money whenever the heck you want?

The Story

A youngandthrifty.ca reader wrote in the other day telling me that she received a statement the other day from the Canada Revenue Agency assessing almost $600 interest on what they called an over contribution.

What she did had was $5,000 in a ING (now known as Tangerine) TFSA high interest savings account.  She withdrew $5,000 at the end of January 2009, she took that money and opened up a TD bank TFSA account with the same $5000 (likely because she would get more interest, I assume).  All was fine and dandy…until June 2010 when she received a letter from the government asking for $600.

Of course she could have used her RRSP – cue the endless TFSA vs RRSP debate – but she thought (as most Canadians d0) that she’d be just fine withdrawing and then investing back into the account.  After all, the government has sort of told everyone that the TFSA is the place to put money in the short term because of how flexible it is right?

How did this happen??


It is estimated that over 70,000 Canadians made the same mistake.  So she wasn’t alone.  Even though there was proof that she took that money out and put it in another TFSA vehicle (in the form of bank statements, etc. etc.), the government still counted the $5,000 taken out in January and put back in as a $10,000 contribution.

They billed her for 11 months of interest, which worked out to be 1% of the excess $5000 per month for the entire year. The details on the CRA website are here.


*I am shaking my fist at the Canada Revenue Agency as I type…uh…. thanks for making sure everyone is clear about these rules, Canada Revenue Agency!*  They need to slap on this alert button that comes on when you are about to withdraw money from your TFSA account that says:  “Are you sure about this?  You cannot re-contribute to your TFSA until next year.”

So what do you have to do to avoid this “over-contribution” and to avoid giving the government even more of your hard earned money?  The government recently announced that they are going to increase the CPP deductions from our paycheques (yes, even more money off our paycheques)… but I digress.

Okay, the basic TFSA rules in laymen terms are as follows in this easy example:

  • Let’s say you put in $5000 March 2009
  • And then you take out $5000 June 2009
  • You can’t put the $5000 back in the TFSA until JANUARY 1, 2010.. otherwise, you’ll get slapped with a 1% interest on the HIGHEST amount of over contribution PER month that you have over contributed
  • You have to keep track of your contribution room
  • They won’t let you know that you have over contributed until spring of next  year- so do your own due diligence

If you realize you have over contributed for this year, here’s what you need to do right away:

  1. remove the excess contribution (get it out of there as soon as possible before they charge you interest for another month!), and
  2. pay the penalty (yes, I know it sucks.. but it’ll suck more when you give another dime to the government)- by filling out the form RC243.  This form is due back June 30.
  3. OR… you can call up Canada Revenue Agency and tell them it was an honest mistake (and have proof) AND took an initiative to fix it.  They may waive the penalty because the TFSA is so new and all.

2018 Update

The TFSA continues to be an excellent savings and investment vehicle for Canadians – that thousands of Canadians misuse every year!  Despite having nearly $60,000 of investment/contribution room available as of 2018, and countless platforms options such as Questrade and Wealthsimple available for us to invest our money with, we are still managing to screw this up!  I even over contributed myself one year!  Don’t make this mistake (who wants to throw away hundreds of dollars in hard earned cash or investment returns?), instead make sure that you do the annual math if you are taking money out of your TFSA.  Of course, if you’re fortunate enough to be able to use the TFSA exclusively for long-term savings then you don’t have to worry about these pain-in-the-butt penalties coming to take a piece out of your account!

Any other reader stories out there about over contribution?  Any close calls?  Did any of the TFSA financial agencies TELL you about the risk of over contribution?

Article comments

JD says:

Mine is a different case. I moved to Canada in 2013. In my CRA my account my TFSA contribution room shows amount accumulated from 2009. Last year, I contributed first time in my TFSA, I asked my financial advisor at Scotiabank how much I can contribute, he mentioned the amount showing in CRA account. So, I put 40k through him from my another scotia account. I withdrew 40k this year. It shows I still have 12k left in the contribution room. Now I came to know that my TFSA room should be calculated from 2013. Then last year I have contributed over 13.5k! That would cause a huge fine over a year. I am trying to contact CRA but it’s tax season and difficult to get hold of any human agent. I know some people who also immigrated about the same time but has same contribution room as mine from 2009. CRA never reached them for over contribute. Not sure why CRA doesn’t fix their system. It may cause me a huge fine. Does anyone else have faced similar situation?

Lin says:

Question about TFSA contributions – let’s say I switch funds within a TFSA as opposed to redeeming and then purchasing new funds. If I switch funds, am I withdrawing and then re- (and over-) contributing? or is that permitted?

Kyle says:

That is definitely permitted Lin. You’ll have to look at what your TFSA account at your banking institution allows though. I have my TFSA through an online brokerage so that makes it easy to trade.

Maxime says:

Maybe I’m not reading this right…. but this seems so strange to me.
Do you also get dinged for changing what kind of TFSA you have? Like if I am with ING, if I switch from a high interest account over to a GIC TFSA, is that treated like a new contribution? Or if I go TFSA to TFSA I am ok?

Teacher Man says:

I’m sorry Maxime, I’m not sure I completely understand. As long as you aren’t going over your contribution limit IN TOTAL with the combined accounts you should be ok I believe.

Maxime says:

Hmm ok maybe I am not reading it correctly. When it says that:

Teacher Man says:

I think you’re comment at the end is correct Maxime. I would recommend asking your bank’s specific adviser just to make sure, but from what I understand that is basically correct.

iwtkangaroo says:

So glad I found this post!!! I was about to switch my TFSA from ING to Ally! Great heads up. 🙂

ldd says:

I am a student holding 10k in a TFSA at RBC. (this was sorta put there on 2010 so i guess i used my 5k for 2009 and 5k for 2010). I am about to take off 10k from it (all of it) and put 5k from this into another TFSA at investor’s group. is this safe? moreover, am i overcontributing?

young says:

@Idd- Okay first of all, why are you putting your TFSA money into investor’s group? 😉 Have you not seen my post on investor’s group?

Well, you would need to talk to RBC if you are closing their account first. And no, I don’t think you are over contributing. You are taking 10,000 out and you are putting 5000 in another account. You still have this year’s 2012 contribution room and last year’s as “leeway”

magda says:

this is an old post, but i’m responding for anyone who ends up here somehow…there is a way to move a TFSA from one financial institution to another without being slapped with the interest charge from CRA or having to wait till the end of the year. It is called a transfer of registered investments (TARI) form, and you can use this for RRSPs as well. It can be used if you are holding cash in your TFSA. If you are holding investments, you might need to cash them out, but not necessarily. If it’s GICs, you need to wait till maturity.

Mavis says:

This can happen in another way – as it did for us. We gave Edward Jones $5000 for a TFSA. We didn’t know that they charge an annual fee, which they didn’t tell us, but took it out of the TFSA. We decided to eventually pull out the money to put against our mortgage and didn’t pay attention that only $4,966 was transferred into our chequing acct. at RBC. The next year we put in $5000 + 5,000 – not realizing that Edward Jones had reported to the govt that we could only contribute $4966, so we we had over-contributed $44. Edward Jones wouldn’t change the paperwork – and the CRA wouldn’t take our word for it, they said that they had to have an amendment from EJ. It isn’t a lot of money, but compounded over time it will be.

young says:

@Mavis- Thanks for sharing. What a headache! Good thing you guys checked and made sure it didn’t go on and on (and accrue interest). A lot of the banks and investment firms are charging fees for the TFSA and neglecting to tell people… I think some of the banks’ yearly fees are around $100 too.

I guess the best way to avoid this is to put your $5,000 in there as soon as you can, at the beginning of the year, and don’t touch it again – but easy to say, hard to do!

young says:

@Financial Cents- EXACTLY. That’s what I do. I don’t touch it until I absolutely need it (haven’t needed it yet, thankfully). I really think it’s the misconception that it’s like a regular non-registered savings account. That would have been really nice if the government came out with it being registered but non-regulated (e.g. take money in and out whenever you want) but that defeats the purpose of it being registered, hehe.

you don’t cash in an RRSP and deposit it somewhere else so why would you do that with a TSFA.

young says:

@AprilFire- thanks for visiting. That’s true, ultimately we are all to blame for these things, not CRA. I think that banks COULD do a better job though, of informing people e.g. before they sign up for a TFSA or withdraw that there might be penalties doing so.

@Dividend Lover- yes, I agree (I personally haven’t cashed out my TFSA at all really). I think it boils down the the marketing/ conception that it is a ‘tax free savings account’. So people think they can treat it like a regular non-registered savings account. Because most people don’t use RRSP’s as a savings vehicle, I guess they are foreign to the concept of a registered account, I suppose.

AprilFire says:

It’s not the CRA that should have made sure YOU knew the rules. It’s written in the print for when you sign up for a TFSA at YOUR BANK. Obviously, it wasn’t read to its full extent