The CRA has sent more than 70,000 Canadians warnings after they over contributed to their TFSAs in 2011, demanding they pay more tax for breaking the rules.
The number of notices is down from the 103,000 sent out in August 2011, but up from the 72,000 shelled out in 2010.
But while it seems the over contribution problem is becoming chronic, a CRA spokesman maintains the number of problematic accounts is still a small fraction of the total accounts opened by the end of the 2011 tax year.
Read: Canadians baffled by TFSAs: 2011 survey
“The proportion of individuals who received a proposed return was less than 1% of the total number of TFSA holders,” Philippe Brideau said in an email.
“This figure is significantly lower than the 1.5% who received proposed TFSA returns in previous contribution years. The vast majority of contributors understand the rules.”
Read: Don’t rule out equities for the TFSA
Tax-free savings accounts are simple to use; they let Canadians earn money on deposits inside the account, without attracting any income tax. The current maximum annual contribution is $5,000.
Read: Educate clients on TFSAs
But, the timing of deposits is key.
Account holders cannot withdraw and replace large amounts from their TFSAs in the same year. If they do so, they face a tax hit for their overcontribution.
Excess amounts are taxed at the rate of 1% for each month an overcontribution exists.
The widespread misunderstanding first became apparent in June 2010, so Canada’s banks and the CRA highlighted the rule on both websites and financial brochures.
Until its clear to all holders, the agency says it will be flexible and waive fees for those Canadians with a genuine misunderstanding of the tax rules.
Of the 103,000 cases identified last year, 38,000 Canadians have sent in payments for the extra tax due. At least 22,500 were granted waivers on amounts averaging $318.
A recent survey found TFSAs are most popular among British Columbians, and least popular among Atlantic Canadians. The CRA says more than $60 billion in assets is currently held within TFSAs.
Read: TFSA holders aren’t investing
And during his campaign leading to the May 2011 federal election, Prime Minister Harper promised to double the annual TFSA contribution limit once the federal deficit is eliminated.
