“My financial advisor overcontributed to my TFSA—now what?”

What happens now? Do I ask him to repay the commissions he received with that investment? I pay him a management fee, but he screwed up and I need to get compensated for this.

Who do I talk to to report this?

—Natalie

Sorry to hear about your penalty with Canada Revenue Agency (CRA), Natalie. Before I answer your question, I am going to do a quick overview of the contribution limits for tax-free savings accounts (TFSAs) in Canada, contribution room calculations and potential TFSA penalties.

What is the contribution limit for a TFSA?

If you were born in 1991 or earlier, you have earned $81,500 of cumulative TFSA contribution room as of 2022. If you were born in 1992 or later, your TFSA room began to accumulate the year you turned 18. It is not pro-rated in the first year and continues to accumulate each year thereafter.

Since TFSAs became available to Canadians in 2009, the annual TFSA limit has fluctuated between $5,000 and $10,000; the annual limit for 2022 is $6,000. (View the annual TFSA limits since 2009.) The annual contribution limit for a TFSA is indexed to inflation and rounded to the nearest $500.

If you move to another country, you do not accumulate contribution room for any year throughout which you’re a non-resident.

How to calculate your TFSA contribution limit

When you contribute to your TFSA, this reduces your remaining contribution room. On the other hand, when you withdraw from your TFSA, that increases your contribution room by the amount of the withdrawal. However, the adjustment to your TFSA room does not take place until January 1 of the following year.

For example, let’s say you were born in 1991 and have always been a Canadian resident. You have never contributed to your TFSA and have accumulated the $81,500 of unused contribution room. If you were to contribute $81,500 to your TFSA in October 2022, you would be left with no room in your TFSA.

Now, let’s say you immediately withdrew $10,000. The amount of the withdrawal would be added to your TFSA contribution room on Jan. 1, 2023, along with the additional TFSA limit for 2023, which is expected to be $6,500 (yet to be confirmed), for a total of $16,500.

The point is you must be careful about using a TFSA like a savings account, in which you deposit and withdraw and deposit again, because your withdrawals do not create new room until the next calendar year.

What are the penalties for TFSA overcontributions?

If you overcontribute to your TFSA, there is a penalty of 1% per month on the overcontribution. In your case, Natalie, it sounds like you contributed $28,500 but only had $6,000 of remaining TFSA room. That $22,500 overcontribution would have been subject to a penalty of 1% per month.

I am guessing you had the overcontribution for eight to nine months, as that would cause a penalty of $225 per month and about $2,000 in total.

TFSA overcontribution penalties are also subject to interest. Currently, CRA’s prescribed rate for overdue remittances is generally 7%.

Penalties and interest can really add up if your overcontribution goes unnoticed for a while. CRA may not notify you right away about the overcontribution, either, so it is important to review your notices of assessment upon receipt. It is also a good idea to check your CRA online account from time to time—especially if you are set up to receive electronic rather than mailed correspondence. Taxpayers frequently miss important information.

It bears mentioning there can be other sorts of TFSA penalties beyond those for overcontributing.

If you hold a prohibited or non-qualified investment in your TFSA, you may be subject to a tax of 50% of the investment’s fair market value. Qualified investments generally include cash, guaranteed investment certificates (GICs), government and corporate bonds, mutual funds, exchange-traded funds (ETFs) and other securities listed on a designated stock exchange.

If you engage in frequent trading in your TFSA, such as day trading, your TFSA may be considered to carry on a business. In this case, the TFSA profits could be taxed as business income at the highest personal tax rate. This varies by province or territory, but it is generally over 50%.

What to do if you overcontribute

If you overcontribute to a TFSA, the best thing to do is make a withdrawal as soon as possible to avoid accruing additional penalties. If you notice the overcontribution on your own, you can file a RC243 TFSA return to report it and calculate the penalty. If CRA notices first, they may send you a proposed TFSA return—a letter that includes information on TFSA rules, the CRA’s penalty calculations and instructions on how to respond.

In your case, Natalie, I gather CRA contacted you about the overcontribution. In terms of recourse, CRA states: “We can waive or cancel all or part of the taxes if we determine it is fair to do so after reviewing all factors, including whether the tax arose because of a reasonable error.”

In order for CRA to consider a request, you must send “a letter that explains why the tax liability arose, and why it would be fair to cancel or waive all or part of the tax.”

If you disagree with a TFSA penalty assessment, you can file a formal appeal within 90 days of the date of the assessment by completing form T400A Notice of Objection.

Final thoughts

It is ultimately the obligation of a taxpayer to monitor their TFSA room. You could try to dispute the overcontribution penalty with CRA, Natalie, on the basis that your financial advisor did not follow your instructions and made an error by contributing more to your TFSA than you requested.

If you pay your financial advisor a management fee, you probably did not pay a commission to buy the investments, so I do not think there is anything to ask him to repay. And the management fees would still have been earned had the deposit been made to another account or had the funds been left in an existing account.

If you do incur a penalty from CRA, it may be reasonable to ask your financial advisor to cover some or all of it, if the penalty was indeed the result of not following your instructions. If the matter is not resolved to your satisfaction, I suppose you could speak to the advisor’s manager to address the issue. Hopefully, between the advisor and their manager, you can figure out a fair resolution.

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

Video: The differences between a TFSA and RRSP

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About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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