Examples - Tax payable on excess TFSA amount
Theresa is a 31-year-old Canadian resident. She opened a TFSA on February 6, 2009, and contributed $5,000 per year for 2009,9010,9011, and 2012. In April of 2013, she contributed $5,500. In February 2014, she contributed $3,500. Later in the year, she received a windfall of $4,100. She forgot that her contribution limit for 2014 was $5,500, and she decided to contribute the entire $4,100 to her TFSA on October 30th.
After making this contribution, Theresa had an excess TFSA amount of $2,100 in her account. This is because her total contributions as of October 30th were $7,600 ($3,500 + $4,100), which exceeded her available contribution room of $5,500.
Assuming Theresa made no further TFSA contributions and no withdrawals during the remainder of 2014, she would have to pay a tax of $63 on her excess TFSA amount. This amount was calculated as 1% per month for each of October to December × the highest excess amount in each month. In other words, $2,100 × 1% × 3 months = $63.
If, after making her $4,100 contribution on October 30, 2014, Theresa had realized her mistake and had withdrawn $2,100 on October 31, she would still have to pay the 1% tax on the excess TFSA amount of $2,100 but only for the month of October. Her tax payable would have been $21 ($2,100 × 1% × 1 month).
Jamal is a 43 years of age and a Canadian resident. He opened his TFSA in 2012 and made a $5,000 contribution in October 2012. In 2013, Jamal made the following transactions during that year:
Jamal's contribution room for 2013 was $5,500. The first contribution that created the excess TFSA amount was the $2,700 contribution on June 3rd. As of that date, his total contributions in 2013 were $7,700 ($4,500 + $500 + $2,700). This means that as of June 3, he had an excess amount in his TFSA of $2,200 ($7,700 of total contributions minus $5,500 of contribution room).
Jamal had to pay a tax on his excess contributions. This tax was 1% of the highest excess TFSA amount in each month and applies until Jamal either withdraws the entire excess amount or until he becomes entitled to enough unused TFSA contribution room to absorb the excess.
In this example, Jamal's tax was $138 for 2013, calculated as follows:
- Highest excess TFSA amount per month for January to May = $0. No tax applicable for those months.
- Highest excess TFSA amount per month for June to October = $2,200. Tax = 1% per month on the highest excess amount = $2,200 × 1% × 5 months, which was $110.
- Highest excess TFSA amount per month for November and December = $1,400. Tax = 1% per month on the excess amount = $1,400 x 1% x 2 months, which was $28.
Although Jamal withdrew $800 in October, the tax was calculated based on the highest excess TFSA amount in each month. The highest excess TFSA amount in October was still $2,200.
For the months of November and December, Jamal still had an excess TFSA amount, but because of the withdrawal he made, his remaining excess TFSA amount for those last two months was $1,400 (the prior excess amount of $2,200 less the withdrawal of $800).
Therefore, in total for 2013, his tax was $138 ($110 for June to October + $28 for November to December).
Beginning in 2014, Jamal’s TFSA contribution room was $4,100 which is calculated as follows:
- Jamal’s 2013 and 2014 TFSA limits ($5,500+$5,500)
- less Jamal’s contributions in 2010 ($7,700)
- plus Jamal’s withdrawals from the TFSA in 2013 ($800).
Therefore, his TFSA contribution room at the beginning of 2014 is $4,100.
The tax of 1% per month will continue to apply for each month that the excess amount remains in the TFSA. It will continue to apply until whichever of the following happens first:
- the entire excess amount is withdrawn; or
- for eligible individuals, the entire excess amount is absorbed by additions to their unused TFSA contribution room in the following years.
Luisa is a 60-year-old Canadian resident. She opened a TFSA in 2009 and contributed $5,000 in January of each year from 2009 to 2012 and $5,500 in January 2013. On June 18, 2013, she received a $13,000 bonus from work. She decided to contribute the entire amount on June 25, 2013.
Since the TFSA dollar limit for each year from 2009 to 2012 is $5,500 and assuming Luisa makes no further contributions or withdrawals, she has to pay a tax on an excess TFSA amount in both 2013 and 2014. The amount of tax payable for each of those years was calculated as follows:
After making her $13,000 contribution on June 25, Luisa had an excess TFSA amount of $7,500 ($13,000 less her TFSA dollar limit of $5,500). The highest excess TFSA amount that remained in her account was $7,500 for every month from June to December. This means she was subject to a tax payable of $525 ($7,500 × 1% × 7 months).
Luisa's unused TFSA contribution room at the end of 2013 was negative (-) $7,500. On January 1, 2014, she became entitled to her 2014 TFSA dollar limit of $5,500. Although this helped to reduce the excess TFSA amount from $7,500 to $2,000, it did not completely absorb it. Luisa continued to have an excess TFSA amount of $2,000 in her account through all of 2014. She had to pay a tax of $240 ($2,000 × 1% × 12 months).
Luisa's unused TFSA contribution room at the end of 2014 was negative (-) $2,000. As of January 1, 2015, she was entitled to a new TFSA dollar limit of $5,500. This fully eliminated or absorbed the excess TFSA amount in her account. Luisa had available contribution room for $3,500 and, as long as she does not contribute more than this amount to her TFSA through the remainder of 2015, she would not have to pay any tax on an excess TFSA amount for 2015.
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