Canada Revenue Agency: 1 TFSA Tip That Could Save You Thousands

TFSA overcontributions are a costly mistake that investors need to work to avoid.

Canadian Dollars

Image source: Getty Images

In early 2019, we hit the 10-year anniversary of the Tax-Free Savings Account (TFSA). Over the course of this year, I’d discussed key mistakes that investors need to avoid when utilizing this dynamic and flexible investment vehicle.

Earlier this month, I’d explained why using your TFSA solely as a savings account can be a waste of its potential, especially for young investors. Investing in low-risk, income-yielding equities like Hydro One is far more rewarding in the long run.

The TFSA has generated some controversy as well. Some investors have managed to rack up hundreds of thousands in tax-free gains due to some savvy and high-risk moves. Many investors have also won big in their TFSA during the boom in cannabis stocks in the back half of this decade. The use of the TFSA by institutional investors has occasionally drawn the attention of the Canada Revenue Agency (CRA).

It is safe to say that investors want to avoid CRA attention, unless they are getting confirmation on their annual filing or the notification of a tax refund. I want to discuss a key tip that will help investors avoid the ire of the CRA going forward.

Watch out for overcontributions

As it stands today, the cumulative contribution room for a TFSA  is $63,500. That is assuming that an investor was eligible for the account since its inception in January 2009. If not, younger investors need to move up from the calendar year they were eligible to determine their total contribution room.

Overcontributions are more common than investors may think. Though this may stem from an innocent mistake, it can be costly in the long term. When an individual exceeds their TFSA contribution limit for the year, the “TFSA excess amount” is subject to a penalty tax of 1% per month. This is multiplied by the overcontribution amount for each month if you are over the limit.

You are required to report the overcontribution on a special return, the “RC243 Tax-Free Savings Account (TFSA) Return.” If this filing is late, the penalty is 5% of the balance owing.

A recent case cited in the Financial Post saw a taxpayer inadvertently contribute $40,000 to his TFSA in 2016. They were subsequently hit with a $2,370 overcontribution tax, and a penalty of $118 for failure to file the special return form. The Tax Court judge urged leniency in this case of human error, but the cancellation of the tax can only be done at the discretion of the CRA.

Investors should be vigilant and check their accounts often

We have all been guilty of human error in the past, but we can also take steps to avoid costly situations like these. If investors are registered with the CRA online, they can login and check their contribution room. Not everyone is registered through the CRA’s online portal, but there are other options. Investors should keep up to date with their financial institution. Sometimes 15 minutes out of your day can save you thousands of dollars down the line.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Ambrose O'Callaghan owns shares of HYDRO ONE LIMITED.

More on Investing

Business man on stock market financial trade indicator background.
Tech Stocks

1 Growth Stock Down 50 Percent to Buy Right Now

There are plenty of growth stocks in the market worth considering, but Shopify (TSX:SHOP) looks like one of the best…

Read more »

You Should Know This
Dividend Stocks

How to Convert a $300 Monthly Investment Into $338 in Monthly Income

If you want a certain amount in monthly passive income, invest a similar amount today and leave the rest to…

Read more »

Increasing yield
Dividend Stocks

3 Income Stocks With Big Yields to Consider in April 2024

If you haven’t yet made your March investments, here are three income stocks to buy the dip and lock in…

Read more »

Senior Man Sitting On Sofa At Home With Pet Labrador Dog
Dividend Stocks

RRSP Investors: Don’t Miss Out on This Contribution Hack!

This hack has so many benefits for you -- not just when you put it in your RRSP but for…

Read more »

edit Sale sign, value, discount
Stocks for Beginners

These 3 Growth Stocks Are on Sale and Set to Surge

Some growth stocks are on sale right now that offer massive long-term potential for investors. Here's a trio to consider…

Read more »

Cannabis grows at a commercial farm.
Cannabis Stocks

Why Canopy Growth Stock Could Double in 2024

Canopy Growth (TSX:WEED) stock saw its share more than double in the last two weeks. So, can it do it…

Read more »

Young woman sat at laptop by a window
Dividend Stocks

3 Dividend Stocks Everyone Should Own for the Long Haul

For investors looking for top-tier dividend stocks to buy and hold for the long term, here are three of my…

Read more »

A red umbrella stands higher than a crowd of black umbrellas.
Dividend Stocks

Passive Income: 2 Safe Dividend Stocks to Own for the Next 10 Years

Dividend stocks such as Manulife and Fortis can help you generate a stable and recurring passive-income stream.

Read more »