Examples – Tax payable on excess TFSA amount

Example 1

Rosanna is 31 years of age and a Canadian resident. She opened a TFSA on February 6, 2009, and contributed the maximum amount she could contribute for each year for 2009 to 2019. In February 2020, she contributed $4,500. Later in the year, she received a windfall of $4,100. She forgot that her contribution limit for 2020 was $6,000, and she decided to contribute the entire $4,100 to her TFSA on October 30, 2020.

After making this contribution, Rosanna had an excess TFSA amount of $2,600 in her account. This is because her total contributions as of October 30 were $8,600 ($4,500 + $4,100), which exceeded her available contribution room of $6,000.

Assuming Rosanna made no further TFSA contributions and no withdrawals during the remainder of 2020, she would have to pay a tax of $78 on her excess TFSA amount. This amount was calculated as 1% per month of the highest excess TFSA amount per month from October to December ($2,600 × 1% × 3 months = $78).

If, after making her $4,100 contribution on October 30, 2020, Rosanna had realized her mistake and had withdrawn $2,600 on October 31st, she would still have to pay the 1% tax on the excess TFSA amount of $2,600 but only for the month of October. Her tax payable would have been $26 ($2,600 × 1% × 1 month).

Example 2

 

Jamal is 43 years of age and a Canadian resident. He opened his TFSA in 2009 and made the maximum contributions in each year for a total of $57,500 by the end of December 2018. In 2019, Jamal made the following transactions during that year:

 
Date Transaction   Amount
January 6 Contribution $5,000
March 10 Contribution $1,000
June 3 Contribution $2,700
October 2 Withdrawal $800

Jamal's contribution room for 2019 was $6,000. 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 2019 were $8,700 ($5,000 + $1000 + $2,700). This means that as of June 3rd, he had an excess amount in his TFSA of $2,700 ($8,700 of total contributions minus $6,000 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 $173 for 2019, calculated as follows:

  • Highest excess TFSA amount per month for January to May was $0. No tax is payable for those months.
  • Highest excess TFSA amount per month for June to October was $2,700. Tax of 1% per month on the highest excess amount was $135 ($2,700 × 1% × 5 months).
  • Highest excess TFSA amount per month for November and December was $1,900. Tax of 1% per month on the excess amount was $38 ($1,900 x 1% x 2 months).

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 $2,700.

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 $1,900 (the prior excess amount of $2,700 less the withdrawal of $800).

Therefore, in total for 2019, his tax was $173 ($135 for June to October + $38 for November to December).

At the beginning of 2020, Jamal’s TFSA contribution room was $4,100 which is calculated as follows:

  • Jamal’s 2019 and 2020 TFSA limits ($6,000 + $6,000)
  • less Jamal’s contributions in 2019 ($8,700)
  • plus Jamal’s withdrawals from the TFSA in 2019 ($800)

The tax of 1% per month will continue to apply for each month that the excess TFSA amount stays in the TFSA. It will continue to apply until whichever of the following happens first:

  • the entire excess TFSA amount is withdrawn for eligible individuals
  • the entire excess TFSA amount is absorbed by additions to their unused TFSA contribution room in the following years

Example 3

 

Francine is 39 years of age and a Canadian resident. She opened a TFSA in 2009 and contributed the maximum amount allowable for years 2009 to 2017. At the beginning of January 2018, she contributed $5,500. On June 18, 2018, she received a $7,500 bonus from work.and shedecided to contribute the entire amount on June 25, 2018.

Assuming Francine makes no further contributions or withdrawals, she has an excess TFSA amount of $7,500 in 2018 and $1,500 in 2019. At the beginning of 2019, there will no longer be an excess contribution in her TFSA. The amount of tax payable for each of those years was calculated as follows:

2018

After making $7,500 contribution on June 25, 2018, Francine had an excess TFSA amount of $7,500. The highest excess TFSA amount that remained in her account was $7,500 for every month from June to December. At a rate of 1%, this means she had to pay $525 in tax on her excess for the seven months the excess remains ($7,500 × 1% × 7 months).

2019
Francine’s unused TFSA contribution room at the end of 2018 was negative (–) $7,500. On January 1, 2019, she became entitled to her 2019 TFSA dollar limit of $6,000. Although this helped to reduce the excess TFSA amount from $7,500 to $1,500, it did not completely absorb it. Francine continued to have an excess TFSA amount of $1,500 in her account through all of 2019. She had to pay a tax of $180 for the year 2019 ($1,500 × 1% × 12 months).

2020
Francine’s unused TFSA contribution room at the end of 2019 was negative (–) $1,500. As of January 1, 2020, she was entitled to a new TFSA dollar limit of $6,000. This fully removed the excess TFSA amount in her account. Francine had available contribution room of $4,500 and, as long as she does not contribute more than this amount to her TFSA through the remainder of 2020, she would not have to pay any tax on an excess TFSA amount for 2020.

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