Tens of thousands of Canadians have again broken the rules for a popular tax shelter, triggering yet another volley of warning letters from the Canada Revenue Agency.

The agency has sent some 76,000 Canadians a mailout reminding them of the strict rules against overcontributions to tax-free savings accounts or TFSAs — and demanding they pay more tax.

The number of problem accounts identified is down from the 103,000 warnings sent out in August last year, but up from 72,000 the year before, suggesting the overcontribution problem is becoming chronic.

Wow. It wasn’t all that surprising that people would be unclear about the finer points of TFSAs the first year, but the fact that it’s still happening would seem to indicate that there are a lot of people who would benefit from a ten minute Intro To TSFAs.

Stranger still, to me at least, is the fact that people don’t seem to be getting any help with this from their contacts at financial institutions.

The kind of cool thing with Tax Free Savings Accounts is that if you take money out of a TFSA, you can re-contribute it later (unlike RRSPs, where once the money is withdrawn, that contribution room is lost forever).  And this seems to be where the misunderstanding originates.

You see – if you take money out of a TFSA this year, you can’t recontribute it til next year (assuming that you’ve maxed out your contributions).


John puts the maximum – $5000/year – into his TFSA each year.  In June 2012, he withdraws it all from his TFSA to put it into a cool new TFSA investment.  Sounds ok, right?  In fact, this would be fine IF the financial institution with which he has the original TFSA investments were to transfer it directly into the new TFSA investment.  If he withdraws it, though, he can’t put it into the new investment until next January.

Now, it’s possible that tens of thousands of people are just accidentally contributing too much to their TFSAs, and that’s the reason for all these CRA warning letters being sent out, but I suspect that this is not the case.

The first year that TFSAs were available, tens (or possible hundreds) of thousands of CRA warning letters were sent out, but the CRA decided to be lenient with the large number of people who had withdrawn cash from their TFSAs and then re-contributed it in the same year, due to a lack of understanding.  I imagine they’re becoming a little less patient with people making that claim – after all, it’s been fairly well documented over the years.

So – this is one example of where a lack of financial literacy can be costly, by making you pay more taxes than you really need to.  Avoid this by taking action and educating yourself.  Or finding a good financial advisor who can take responsibility for making sure this sort of thing doesn’t happen to you.  Your choice…

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