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Hudson Bay Finance · Situational answers

You got a CRA letter about a TFSA over-contribution

The CRA monitors TFSA contributions annually and notifies people in late spring, through a CRA account or by mail. The letter is a notification, not the end of the process, and the order of the steps changes what it costs.

The CRA writes about TFSA excess amounts in late spring, and the letter is about a year that has already closed. The agency’s own instruction is a four-step order, and the first step is removing the excess, not filing anything.

The gap between the contribution and the letter is not an oversight. It is the reporting cycle.

Why it arrives when it arrives

“The CRA monitors TFSA contributions on an annual basis and will notify you if you have an excess amount. We typically notify you through your CRA account or by mail in late spring” (canada.ca).

The upstream date explains the lag: “Financial institutions only send transaction information for a given calendar year at the end of February of the following year” (canada.ca).

A contribution made in March is therefore reported the following February and written about the following spring. In the meantime the monthly tax has been accruing on it.

The order the CRA sets out

Four steps, in this order: “Remove the excess amount … Complete the required TFSA tax forms … Send your TFSA tax forms to the CRA … Choose a payment method and submit the amount owing” (canada.ca).

Step one is first because the tax is still running. “Any excess amount in your TFSA is taxable at a rate of 1% per month. This is calculated on the highest amount of excess in your account for each month it remains. If you over-contribute to your TFSA at any time in the year, withdraw the full amount of the excess as soon as possible to reduce the tax you owe” (canada.ca).

What a spring letter means arithmetically, worked

Suppose a $3,000 excess arose in April of last year and is still in the account when the letter arrives the following May. At 1% of the highest monthly excess that is $30 a month. April to December of the first year is nine months, $270; January to May of the second is five more, $150. The running total by the time the letter is read is $420, and it grows by $30 for every further month the excess sits there. That arithmetic applies the CRA rule quoted above and is not a CRA example.

The CRA’s own worked cases make the related point about partial withdrawals: over- contribute $6,000 in August and withdraw $4,000 in mid-September, and the charge is still $60 for each of those two months, “because the 1% tax applies to the highest amount of excess that is in the account in a month” (canada.ca).

Partial removal does not buy a partial month.

Where the filing goes, and by when

Form RC243 with its Schedule A, submitted through “Submit documents” in a CRA account or by mail to the TFSA Processing Unit in Sudbury or Winnipeg, “by June 30 of the calendar year after the year the tax applies” (canada.ca).

A late-spring letter and a June 30 deadline are close together on purpose. Which form belongs to which account, and what the RRSP and FHSA deadlines are instead, is in RC243 or T1-OVP: which form your situation needs.

Two ways to push back, and they are not the same

If the calculation looks wrong, that is an objection: Form T400A, within 90 days of the date on the notice of assessment (canada.ca).

If the calculation is right but the situation was an error, that is a waiver or cancellation request, which the CRA reviews against three named points (canada.ca). What that letter has to show is set out in asking the CRA to waive a TFSA penalty.

If the letter is the first you have heard of a problem, the figure that produced it is worth checking against your own statements before anything else: when the CRA says your TFSA contribution room is something else, and the cost of the tax itself is worked through in what the TFSA over-contribution penalty actually costs.

The record the next twelve months need

Hudson Bay Finance makes a contribution-room tracker that keeps a dated record of contributions and withdrawals, which is what both the return and any waiver letter are written from. TFSA tracking is free.

Common questions

Why did the CRA send me a letter about my TFSA?
The CRA states that it monitors TFSA contributions on an annual basis and will notify you if you have an excess amount, typically through your CRA account or by mail in late spring.
What do I do first?
The CRA's own sequence starts with removing the excess amount, then completing Form RC243 and Schedule A, then sending them in, then paying. Withdrawing first is what stops the monthly tax accumulating.
Can I dispute the letter?
The CRA distinguishes two routes. A notice of objection on Form T400A within 90 days of the notice of assessment disputes the calculation. A waiver or cancellation request asks the CRA to relieve a tax it calculated correctly.
Why does the letter arrive so long after the contribution?
The CRA states that financial institutions only send transaction information for a calendar year at the end of February of the following year, and that its own TFSA figures update once a year in the spring.

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Written by Mo Kechout All answers