TFSAs : Confusion over Withdrawals
Confusion exists amongst Canadians about the rules of Tax Free Savings accounts.
72,000+ Canadians were hit with unexpected tax bills in June 2010 after getting notices they had violated a major restriction on TFSAs, according to an article by The Canadian Press. Click HERE to view the original article.
Account holders can put back amounts withdrawn from their TFSAs, but only in the next calendar year. If deposited in the same year, the account holder will face a tax hit for "over contribution" even if returning the withdrawn money.
Last fall, a focus-group commissioned by the Canada Revenue Agency discovered that many TFSA account holders remained confused and that most were unable to navigate the Canada Revenue Agency's web site to find the rules governing TFSAs.
The report stated "there was very little top-of-mind awareness of rules around the withdrawing and putting money back in within the same calendar year". The focus-group report continued "Overall, less than half the participants arrived at the correct information page within the time allotted (three to five minutes ), and only a small number arrived at this page quickly".
"Several participants commented that had the moderator not told them to look for a TFSA guide, they would never have realized a guide is available at the site."
The Canadian Press article states that confusion about the over contribution rule can be traced to February 26, 2008, when Finance Minister Jim Flaherty announced the tax shelter in his budget.
A brochure provided details about the various rules, but it included nothing on the "next-year rule".
The Canada Revenue Agency has issued tax waivers to more than three-quarters of the 22,000 TFSA account holders caught by the rule and who asked for relief. Another 28,100 people paid the extra tax.
As a result of the focus-group study, the Canada Revenue Agency's web site has been updated in order to make it more user-friendly.
On the TFSA web page, click on Making Withdrawals. Click HERE to view. The two examples are very useful in clarifying withdrawal rules.
The subject of withdrawals and other rules are discussed in the Tax-Free Savings Account (TFSA), Guide for Individuals. Click HERE to view the guide.
You can also call the Canada Revenue Agency at 1-800-959-8281 for more details about TFSA accounts.
If you want to move your TFSA account or part of your TFSA account to another financial institution, ask your bank first if Money Transfers (institution to institution) are possible without paying extra taxes; i.e. ask if Money Transfers will affect the Contribution Room for the year without penalty or breaking of any TFSA rules.
2 thoughts on “TFSAs : Confusion over Withdrawals”
I just received my notice of over-contribution. I was in shock to say the least. Obviously, the financial advisor at my bank did not understand the rule about withdrawing and putting back money within the same year and had misinformed me. I asked about this specifically and the financial advisor knew that I had contributed and withdrew, then re-contributed. I wish the government could warn us when we are over-contributing or clarify the rules about withdrawing & putting back. I only searched this article today when I was hit with this shocking assessment of over-contribution. 1% per month is severe punishment for those who had no idea. This amount is a lot greater than the interest I earned on the whole amount in my TFSA. If this is the way that the government is trying to encourage and help the average Canadian save money, it’s not working. It takes an accountant and a lawyer to figure out all the fine prints!
Hi Sue-Anne
On August 19, 2011, Revenue Minister Gail Shea and Finance Minister Jim Flaherty indicated that the government would consider waiving extra taxes owed “in cases where a genuine misunderstanding of the TFSA contribution rules occurred”.
If you have questions about your TFSA or how to apply for a waiver, the Canada Revenue Agency encourages you to call them at 1-800-959-8281. You have 60 days to respond to a proposed TFSA return.
Hope this information helps.