The best way to get the most out of your Tax-Free Savings Account while staying within your limits is to:

• Remember that the annual TFSA dollar limit is for all your TFSAs
• Calculate your contribution room before you contribute (check My Account + your contributions through your financial institution)
• Keep in mind that withdrawals aren’t added back to your contribution room until the next year

Here’s some common mistakes people make when it comes to contributing to their TFSA:

Scenario 1: Managing more than one TFSA with different financial institutions

Johnny, an 18-year old resident of Canada, opens his first TFSA in February 2022 with Rose Bank. The TFSA annual dollar limit is $6,000 for 2022. Johnny’s contribution room for 2022 is $6,000. He contributes $6,000 to this TFSA.

In September of the same year, Johnny opens a second TFSA with Tropical Bank and contributes $6,000 to this TFSA.

Since the TFSA contribution room limit applies to all TFSAs combined, Johnny has contributed over the limit. He receives a warning letter from the CRA in My Account in May of the following year. Johnny checks My Account regularly and is signed up for email notifications. He reads the letter and removes the excess contributions from his TFSA. Because of his quick action, Johnny avoids paying tax on his overcontribution.

Now Johnny keeps records of his contributions for all of his TFSAs and makes sure the total is within his contribution limit.

Scenario 2: Making an indirect transfer

Alexis is 43 years of age and a resident of Canada. She opens a TFSA in 2009 and contributes the maximum amount allowable for years 2009 to 2023; a total of $88,000. In 2024, Alexis begins the year with a TFSA contribution room of $7,000, but does not make further contributions.

Alexis receives an offer for a better interest rate with a different financial institution. She decides to take advantage of this offer. In April 2024, she withdraws $50,000 from her TFSA and contributes it to a new TFSA.

Since Alexis withdrew the money and deposited it in the new TFSA herself, she has overcontributed $43,000. To avoid this overcontribution, Alexis should have requested a direct transfer from her existing financial institution to her new one. A direct transfer does not result in tax consequences.

Because Alexis did not move the money using a direct transfer, she will be assessed by the CRA and could have to pay a 1% tax for the months that the excess amount remains in her TFSA.

Alexis’ withdrawal amount of $50,000 won’t be added back to her TFSA contribution room until the next year.

Scenario 3: Checking your contribution room in My Account early in the year

Moira, a resident of Canada, turns 18 in August 2020. In July 2021, she opens a TFSA and contributes $12,000, which is the maximum she was allowed to contribute based on the annual TFSA dollar limit for 2020 ($6,000) and 2021 ($6,000).

The new annual limit for 2022 is $6,000 and is included in Moira’s My Account on January 1. Moira checks My Account that day to confirm her TFSA contribution room, and the amount displayed is $18,000. In February 2022, Moira makes a $10,000 contribution , which puts her $4,000 in excess and subject to the excess tax.

Moira did not realize that the TFSA contribution room in My Account did not reflect all of the previous year’s transactions when she accessed it on January 1. This is because her financial institution had not yet submitted information about her transactions at that time. Financial institutions have until the end of February to send information about the previous year’s transactions. Moira should have compared her transaction history from her financial institution with the transaction summary in My Account to verify her TFSA contribution room.

Find out more about your TFSA contribution room.

Scenario 4: Making withdrawals and contributions in the same year

Since opening her TFSA in 2009, Twyla has contributed the maximum TFSA dollar limit each year. At the end of 2023, she has no TFSA contribution room left.

In 2024, Twyla makes a $7,000 contribution (the annual TFSA dollar limit for 2024). Later that year, she withdraws $3,000 for a trip. Unfortunately, her plans change and she cannot go. She decides to re-contribute the $3,000 she withdrew.

Twyla does not realize that if she returns any of the withdrawn amount before 2025, she will have an excess amount in her TFSA and will be charged a tax equal to 1% of the highest excess TFSA amount for each month that the excess stays in her account. This is because any withdrawal amount will only be added back to her contribution room the following year.

Scenario 5: Contribution room available to new Canadian residents

David turned 40 in 2023 and also became a resident of Canada the same year. In November of 2023, he received an inheritance and contributed $88,000 to a newly opened TFSA, as he believed he was entitled to the total annual TFSA dollar limit since the program began in 2009.

David did not know that the annual limit only applies to him for the years he was a resident of Canada. Because David has only been a resident of Canada for one year, he only has $6,500 in TFSA contribution room, which is the annual limit for 2023.

If he does not remove his excess contribution right away, David will have to pay a tax of 1% on the highest excess amount for every month that the money remains in his TFSA.