By now, most Canadians are familiar with the use and the benefits of a tax-free savings account (TFSA), which has proven to be a very popular savings vehicle since TFSAs were introduced in 2009. What’s been harder has been keeping track of one’s annual TFSA contribution limit.
The annual TFSA contribution limit allowed by law has been something of a moving target, subject to change after change by successive governments. As well, withdrawals made from a TFSA are added to one’s annual contribution limit, but not until the following taxation year – a fact that has escaped many TFSA holders and sometimes even their financial advisers. And finally, the Canada Revenue Agency (CRA) used to provide information on a taxpayer’s current year TFSA contribution limit on the annual Notice of Assessment, but that’s no longer the case, meaning that the taxpayer has to make an extra effort to obtain that information.
The quickest starting point to determining one’s TFSA contribution limit for 2016 is to call the CRA’s Individual Income Tax Enquiries Line at 1-800-959-8281. Once that contribution limit number is known, the taxpayer will need to determine how much, if anything, has been contributed to their TFSAs already, in 2016. This is a good time to note that there is no limit to the number of plans which an individual taxpayer can have, only a limit on the amount of the overall contributions made to such plan or plans during the year.
Some taxpayers contribute on a pre-planned, often monthly basis, while others are in the habit of depositing regular or irregular or periodic income receipts, like a tax refund or monthly tax benefit amount, into their TFSA. Either way, after finding out what the current year contribution limit is, it’s necessary to calculate how much has already been contributed.
The balance represents the amount which can be contributed before the end of 2016 without going offside and incurring an over-contribution penalty. That’s especially important this year for those who contribute on a recurring basis, often through automatic transfers from another bank account.
For 2015, the maximum allowable annual TFSA contribution amount was $10,000. That limit was reduced, effective January 1, 2016, to $5,500. Consequently taxpayers who set up automatic contributions to a TFSA, when the $10,000 limit was in effect, may find themselves going offside where such arrangements were not changed earlier this year to reflect the new, lower annual contribution limit.
A similar calculation will need to be made for contributions to an RRSP, but in this case the information needed is easier to come by. Every taxpayer who filed a return for 2015 will be able to find the amount of their maximum RRSP contribution for 2016 on page 4 of the Notice of Assessment (NOA), which they received after filing.
Once that number is known, the only remaining step is to ensure that contributions already made for 2016 and those which are planned to be made on or before March 1, 2017, stay within that annual contribution limit.
Especially where, as financial advisers often counsel, an individual makes contributions to an RRSP or TFSA (or both) throughout the year by automatic deposit or bank transfer. When this happens, it’s easy to assume that everything has been taken care of and nothing further needs to be done with respect to such plans, however, an “out of sight, out of mind” approach rarely makes for good financial and tax planning. Therefore, it is recommended that the status of one’s RRSP and TFSA are checked on a periodic basis to help ensure that everything remains onside, and unnecessary penalties aren’t incurred
