Tax Free Saving Accounts (TFSA) - Tax Impact on Over-Contribution:

In a September 1, 2012 Metro News article, it was noted that 76,000 Canadians in 2012 (103,000 in 2011) received a letter from Canada Revenue Agency (CRA) regarding over-contribution to TFSAs. This letter also included a request for tax payment. About 15,000 of these were repetitive Canadians from 2011. It was noted that the problem accounted for a tiny fraction of all the TFSA accounts opened by 8.2 million Canadians by end of the 2011 tax year.There is a misunderstanding in the tax rule governing the timing of re-contribution, which triggers the over-contribution. As per the tax rule;

• Account holders can put back the amounts they withdraw from a TFSA only in a later calendar year unless they have enough unutilized contribution room;
• If it is re-deposited in the same calendar year without adequate contribution room, they face a tax hit for their over-contribution, even though they're only replacing the withdrawn funds.

In the situation where genuine misunderstanding of the rules has occurred and the over-contribution is removed within a reasonable period of time, the tax may be waived.In 2011, at least 22,500 tax payers asked for and were given waivers on the extra taxes. The waived amount averaged $318.Editor's CommentThe tax rate on the over-contribution is 1% per month of the over contribution amount. If you have received such a letter from CRA then it is worth filing a request for Tax Relief to the TFSA Processing Unit, P.O. Box 9768, Station T, Ottawa, ON K1G 3X9