Confusion does not seem to be the main reason why some Canadians over-contributed to their tax-free savings account (TSFA) last year, according to the Canada Revenue Agency.
In June, about 2%, or 70,000 Canadians, were sent letters requesting more information about over-contributions made to their TFSA accounts. Those letters included a pre-assessed amount of tax on contributions above the $5,000 per year limit.
At the time, the CRA said the letters did not mean that an individual was necessarily subject to tax, if they could provide an explanation that their over-contribution was a genuine mistake.
However, CRA spokeswoman Caitlin Workman told BIV in an interview Tuesday that, so far, about 39,000 people who responded to the letter did not dispute the amount of tax on their excess contribution.
“Seventy-five percent of the 52,000 responses we’ve received so far did include a payment to pay the taxes they were pre-assessed at.”
About 18,000 Canadians still have until August 3 to submit an explanation about their over-contributions to avoid paying the tax, if there was a genuine confusion. After that, they will be required to pay the assessed amount.
Workman noted, however, there are still some nuances of the TFSA that Canadians should be aware of to avoid inadvertent over-contributions in the future.
Canadians should not be using their TFSA like a regular banking account, depositing and withdrawing funds on a regular basis, because withdrawn funds cannot be put back until the following year. For example, if you deposited $5,000 in January, and then took out $1,000 in March, depositing another $1,000 in May would be considered an over-contribution, according to the TFSA rules.
She also noted Canadians should make sure their bank is transferring funds “by the book” from one TFSA account to another to ensure that the transfer is not considered an over-contribution. This is especially true for transfers between financial institutions or between savings accounts and investment accounts within a TFSA.
Despite the intricacies of the program, TFSAs remain a popular new savings vehicle with more than 4.7 million Canadians over the age of 18 opening a TFSA account last year.
More information about TFSAs are available on the CRA’s website or at any financial institution.