TFSA holders on the hook for overcontribution tax — even if account is worthless

Someone who overcontributes to a TFSA and then loses all the money in the account on a bad investment would still owe tax on the overcontribution, a Canada Revenue Agency official said at the virtual 2021 STEP Canada national conference on Tuesday.

That person would be ineligible for a waiver on the overcontribution tax and continue to be liable until the excess TFSA amount is “reduced with new contribution room available to the individual in future years,” said Marina Panourgias, manager, Trust Section I, Income Tax Rulings Directorate with the Canada Revenue Agency, in a prepared response to a question posed during the CRA roundtable session of the conference.

Any TFSA holder who contributes more than their contribution limit is subject to a 1% tax on the excess amount, applied monthly, for each month the excess amount remains in the TFSA.

A TFSA holder can correct an overcontribution by removing the excess contribution amount, thereby minimizing the potential tax penalty. The holder can also request the tax penalty be waived, which involves arguing the overcontribution was inadvertent and withdrawing an amount equal to the overcontribution, and any income or gains associated with the overcontribution, from the TFSA.

At the conference, Panourgias was given a hypothetical scenario of a taxpayer, newly arrived in Canada, who opens a TFSA in 2021. As the taxpayer was previously a non-resident, their total TFSA contribution room for 2021 is only $6,000. Misunderstanding the rules, the individual contributes $18,000 into their TFSA in the year, $12,000 more than their contribution limit. They invest the $18,000 into shares of one company, which promptly goes bankrupt, resulting in the TFSA having a zero value.

Would the individual have any way of stopping the tax associated with the excess amount or being granted a waiver?

In a response, Panourgias said the taxpayer could not mitigate the tax by withdrawing the excess amount (as there would be nothing in the TFSA to withdraw); nor could they get a waiver, since the taxpayer could only qualify for one by withdrawing the excess contribution, plus any associated income or gains.

“Assuming the individual doesn’t make any additional contribution to their TFSA before 2024 [which would add to the excess amount], and the TFSA dollar limit for 2022 and 2023 remains at $6,000, the excess TFSA amount in this situation would be reduced to $6,000 as at Jan. 1, 2022 and fully eliminated as at Jan. 1, 2023,” Panourgias said. “So, the result is that the individual would be liable for the 1% tax in 2021 and 2022 and would need to complete Form RC243 and remit the tax for each of those years. Then the individual could begin making contributions to their TFSA again in 2024.”

Rudy Mezzetta

Rudy is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on tax, estate planning, industry news and more since 2005. Reach him at rudy@newcom.ca.