Simon* has always taken care of his investments himself. Two years ago, he decided to transfer his $50,000 TFSA to another financial institution, in a self-directed account. A year later, the shock, the taxman claims $ 6,000 plus interest. He doesn’t understand, he just moved his money from place to place. What fault did he commit? Tips for avoiding this kind of problem with excess contributions.
Watch out for moving money
The problem with Simon’s case? He handled his transfer himself thinking he had the right to withdraw and redeposit his money. In fact, the law is clear, an individual who has withdrawn money from his TFSA cannot return these sums if they exceed the maximum contribution to which he is entitled. He must wait for the 1er January of the following year to re-deposit their money. “In order to be able to close an account and transfer the money to another, you absolutely have to go through a financial institution. An individual cannot do this by himself,” explains Line Moreau, Chartered Professional Accountant (CPA).
Salty penalties
Although infrequent, Simon’s case is not unique, but the financial consequences can be significant, as the professional points out: “The Canada Revenue Agency (CRA) calculates a tax of 1% per month on the amounts excess that has been paid plus interest. In the case of a large surplus, the debt can quickly climb,” notes Line Moreau.
Red light on the many accounts
PHOTO CHARLES WILLIAM PELLETIER, SPECIAL COLLABORATION
Steve Adam, financial security advisor for Groupe Cloutier
Steve Adam, financial security advisor for the Cloutier Group, also sometimes has to settle the case of excess contributions. The manager ? The many accounts held by individuals. “The law does not prohibit having several TFSA accounts everywhere, but for an individual, it can become difficult to follow if you make withdrawals there. It is also impossible for a financial planner to know if his client has revealed all the places where he has contributed, because the financial institutions will not transmit this kind of information.
Information that is not up to date
By telephone or on the Internet, Steve Adam systematically checks with the CRA the right to contribute to the TFSA of his clients, but the problem is that the information is not up to date. Moreover, on its site, the CRA indicates: “Your transactions from the previous year may not have been received or collected by the CRA and may not appear in the amount. Tip, watch your contributions and withdrawals closely, because if you’ve overcontributed, it could be months before the CRA finds out and sends you a bill.
Non-resident, beware
You have decided to work or live abroad for a period of more than six months, beware, according to the tax authorities you could be considered a non-resident. If so, any contributions made will be subject to 1% tax for each month the contribution remains in the account.
Long steps
Unlike the RRSP, there is no overcontribution loophole in the TFSA. Unable to use the money to pay off her Home Buyers’ Plan (HBP) or contribute to her spouse’s TFSA. The only way out is to prove the error in good faith. “If the financial institution made a mistake or if we made a mistake and we checked TFSA or instead of RRSP, we can send letters and explain the situation. You have to take several steps to correct the situation and therefore be very patient, ”says Line Moreau.
*Fictitious first name, real situation