Investors risk hefty fines as outdated data and strict rules catch thousands off guard in 2024
Thousands of Canadians are facing steep penalties as the Canada Revenue Agency (CRA) intensifies its pursuit of tax-free savings account (TFSA) overcontributions, with $166.2m in penalty taxes assessed in 2024 alone, according to data obtained by Investment Executive cited by Financial Post.
This marks a significant increase from $130.8m in 2023, highlighting a persistent issue that continues to catch even experienced investors off guard.
The penalty for overcontributing is severe: one per cent per month on the excess amount, compounding until the overcontribution is withdrawn.
While the CRA has the authority to waive or cancel this tax if the error is deemed “reasonable” and the excess is removed “without delay,” the agency maintains a strict definition of what qualifies as a reasonable error.
As reported by the Financial Post, misunderstandings about one’s contribution room or simple carelessness do not meet the threshold for relief.
A key driver of overcontributions is confusion around the actual TFSA limit.
Although the CRA’s My Account portal provides contribution information, it may not reflect recent transactions, as financial institutions only update the CRA at the end of February each year.
This lag means that investors checking their available room early in the year may be working with outdated figures, a situation that has led to costly mistakes for many, as noted by the Financial Post.
The consequences can be especially harsh for those who suffer investment losses within their TFSA.
In a recent Federal Court case, a taxpayer who lost over 90 per cent of his TFSA’s value was still assessed significant overcontribution penalties, as he was unable to withdraw the excess once his account balance fell below the overcontributed amount.
The judge described this as a “perpetual tax trap,” but ultimately agreed with the CRA’s decision to deny relief, emphasizing that the responsibility to monitor contribution limits rests with the account holder.
The TFSA’s flexibility—allowing tax-free growth and withdrawals at any time—remains a powerful tool for wealth accumulation and retirement planning.
However, as Dale Jackson wrote in BNN Bloomberg, the onus is on individual investors to track their own limits, especially as annual allowable amounts have changed over time and can be complicated by multiple accounts or institutions.
Withdrawals restore contribution room, but only in the following calendar year, making timing a critical consideration for those managing significant assets.
As the number of TFSA holders approaches 20 million, the stakes for getting it right have never been higher.
According to Investment Executive, the average penalty tax assessed per overcontributor was $1,252 in 2024.
