TFSA Penalties: Advisors Can Help

TFSA holders can withdraw any amount they want from their TFSAs at any time, but as close to 55,000 people found out in warning packages from CRA recently, putting the money back can create a 1% per month penalty if it’s done at the wrong time.

Essentially, you can’t put money back into a TFSA in the year you have withdrawn it unless you have available contribution room. That’s because withdrawing funds does not reduce the total contributions you have made for the year. You must wait to re-contribute at the start of the new calendar year when your withdrawal is added back to your TFSA contribution room.

The penalties are a significant burden for some investors, as described last week in the Globe and Mail by Rob Carrick, who also called for an amnesty from the penalties.

Those who have contribution room during the year can contribute up to the maximum of that room at any time. If in doubt, best to check with a tax professional before recontributing to your TFSA.

Clearly it’s those who have been vigilantly contributing the maximum to the plan who have to be especially careful on recontribution. Today, close to 11 million Canadians have TFSAs and the average account holding is approximately $7500 according to Investor Economics. That’s well under the upper level of contribution room: $31,000. 

TFSAs are a wonderful investment for resident adults in Canada and a favourite for retirees who have melted down registered funds or who have RRSP contribution restrictions due to earned income limitations or age limitations. They are a perfect complement to an RRSP strategy for those who can afford to do both.

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