A Tax-Free Savings Account (TFSA) is a great way to grow your money without paying taxes on the gains. But did you know that moving your TFSA the wrong way could cost you money? Many people make costly mistakes when transferring funds between TFSA accounts. Here’s what you need to know to avoid unexpected penalties.
How TFSA Transfers Work
Each year, the Canada Revenue Agency (CRA) tracks how much money you put into your TFSA. If you go over your limit, you may have to pay a penalty tax of 1% per month on the extra amount until it’s removed. This is why it’s so important to follow the correct process when moving your TFSA from one bank to another.
There are two ways to transfer money between TFSAs:
- Direct Transfer (Safe Way) – Your bank moves the money for you, ensuring it doesn’t count as a new contribution.
- Withdrawal & Deposit (Risky Way) – You withdraw the money yourself and then deposit it into a new TFSA. This can lead to an overcontribution problem if you don’t have enough room left for the deposit in the same year.
A Costly Mistake to Avoid
Let’s say you have $10,000 in a TFSA at Bank A. You want to move it to Bank B for a better interest rate. If you withdraw the $10,000 and deposit it into the new TFSA yourself, the CRA will see this as a brand-new contribution. If you don’t have $10,000 of available room left, you’ll face a penalty tax.
That’s exactly what happened to a taxpayer in a 2024 court case. He withdrew money from one TFSA and put it into another, thinking it was a simple transfer. But because he didn’t do it through the bank, the CRA counted it as a new contribution. He ended up overcontributing and had to pay a penalty tax, which the CRA refused to waive.
How to Avoid TFSA Overcontribution Penalties
- Always request a direct transfer – Contact your financial institution and ask them to move the funds for you.
- Check your TFSA contribution room – You can do this through the CRA’s online portal, My Account, or by calling the CRA.
- Be aware of the timing – If you withdraw funds, you don’t get the contribution room back until the next calendar year.
- If you make a mistake, act fast – If you accidentally overcontribute, withdraw the extra amount right away and contact the CRA to request a penalty waiver.
Plan Your TFSA Transfers Wisely
Moving your TFSA can be a smart financial move, but only if you do it the right way. Avoid unnecessary taxes and penalties by following the correct steps.
Want to make the most of your TFSA and other investments? Book a meeting with a financial planner today to ensure your money is working for you.
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