Tricky TFSA rules keep tripping up thousands of Canadians who make withdrawals from their TFSA accounts and replace the money too early.
Around 55,000 taxpayers got warning packages from Revenue Canada this year about the problem affecting their 2013 tax year, and were told that they face penalties.
The regulations say that account holders can put back the amounts they withdraw from a TFSA only in a later calendar year. Doing so in the same calendar year exposes them to a tax hit for over contributions, even though they’re only replacing the withdrawn funds.
By the end of 2013, some 10.7 million Canadians had a TFSA, a savings vehicle that allows your money to grow tax-free with no income-tax hit on withdrawal.
The popular savings tool cost the federal treasury some $410 million in forgone taxes in 2013, or more than a billion dollars over its first five years.
Some taxpayers are slow to absorb the tricky withdrawal rule.
As of the end of last month, Revenue Canada had waived penalties for more than 17,000 Canadians who broke the rule in 2012. The average penalty waived was $516, or a total of almost $9 million.
And for the 2013 taxation year, more than 20,000 Canadians have already paid their penalties.
Taxpayers who received a TFSA warning package in the mail this summer were given 60 days to respond. Those who don’t respond get a notice of assessment, imposing a penalty.
A spokesman for the agency says the onus is on Canada’s banks and other financial institutions to make sure their customers know the rules.
The current maximum annual contribution to a tax-free savings account is $5,500, though Prime Minister Stephen Harper has promised to double the maximum once the federal books are balanced.
Follow this Simple Rule:
If you withdraw money from your TFSA, then Wait until next Year to put the Money back in your TFSA.
If you do get the nasty letter from CRA, then talk to Softron at 905.273.4444 or Email us at firstname.lastname@example.org we will help you avoid the Penalties.