The Canadian Revenue Agency (CRA) has sent more than 70,000 notices
to Canadians who over contributed to their Tax Free Savings Accounts (TFSAs) in
2011, demanding they pay more tax for breaking the rules.
While it would seem the over contribution problem is chronic;
the numbers are down from 2010 (103,000 notices) and the number of problematic
accounts only represent 1% of TFSA holders’.
“This figure is significantly lower than the 1.5% who received proposed
TFSA returns in previous contribution years.
The vast majority of contributors understand the rules.” Philippe
Brideau a spokesperson from CRA said in an email.
TFSAs are simple in nature; they let Canadians earn money on
their investments inside the account without tax implications. The current maximum annual contribution is
$5000 and like your RRSP this amount is carried forward if you don’t contribute
in a given year. Currently a new TFSA
investor can contribute up to $20,000.
Timing is Key
Account holders cannot withdraw and re-contribute large
amounts in the same year. If they do,
they will be taxed on the over contribution.
Excess amounts are taxed at the rate of 1% per month for every month the
over contribution exists.
Until the rules are clear to all investors, CRA says they
will be flexible and waive fees for those Canadians who genuinely misunderstood
the rules. Of the 103,000 cases in 2010, 38000 have sent
in payments while 22,500 were granted waivers.
The average penalty was approximately $318.
The CRA says there is more than $60 billion dollars currently
invested in TFSAs. In addition, Prime
Minister Harper promised during his last campaign to double the annual
contribution limit once the federal deficit is eliminated.
A TFSA is an excellent investment vehicle to add to your portfolio;
however they do not make sense for everyone.
If you are unsure of the rules, or are wondering if they make sense for
you; give me a call.
Have a great weekend,
Tracey
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