Beware of the TFSA ‘Danger Zone’

The first four months of the year have been referred to as a ‘danger zone’ for those relying on TFSA contribution room data posted on their CRA account. If you’ve based your TFSA contributions on “My Account” information, be aware that it may not be accurate. According to the CRA, contributions or withdrawals made in the previous year may not be reflected in the current year’s contribution room until “after the end of February,” as issuers have until the final day of February to submit TFSA transactions to the CRA. However, the lag in updating data could extend to March or even late April.

This is important to prevent penalty charges on excess TFSA contributions, which are assessed at one percent per month on any excess amounts. Over the past few years, the penalties have been significantly increasing. In 2022, the total paid in overcontribution penalties was $132.6 million, over triple the amount paid in 2019.¹

What is driving this increase? There may be various reasons. The lag in CRA reporting times can often create confusion. Some hold multiple TFSA accounts, increasing the likelihood of recordkeeping errors — recent statistics suggest that 245,000 TFSA holders have between five and nine TFSA accounts!1 As well, there may simply be a misunderstanding of the rules. For instance, when TFSA funds are withdrawn, remember that they only become available for contribution at the beginning of the following calendar year.

Ultimately, it is the taxpayer’s responsibility to maintain accurate records. If you rely on CRA contribution room information, a general guideline is to wait until late April when all records should be updated.

^{1. https://www.theglobeandmail.com/investing/personal-finance/article-people-keep-making-this-costly-tfsa-mistake-and-paying-penalties/}

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