If you contribute more than your available contribution room to your Tax Free Savings Account (“TFSA”) you will have to pay a tax equal to 1% of the highest excess TFSA amount for each month that the excess amount stays in your account.
Generally, over-contributions are easy to fix. You instruct your financial institution to withdraw the over-contributed amount; file a form RC243 (TFSA Return) reporting the over-contribution; and pay the over-contribution tax.
Click here to access the RC243 Form (TFSA Return)
But what if you’ve lost money in your TFSA and you are unable to remove the over-contributed amount due to the decrease in value of your TFSA? Simply put… you’re screwed.
Some people over-contribute with the idea that they will invest the money in the stock market or cryptocurrency, withdraw the over- contribution after they have made a profit, and hopefully the profit on the investment will exceed the tax payable on the over-contribution. But things don’t always go according to plan.
Any investment losses within a TFSA are not considered a withdrawal. Not only will you have lost your investment, but the Canada Revenue Agency (“CRA”) will continue to charge you the 1 % per month tax on the over-contributed amount until your new contribution room in the following years has reduced the excess TFSA amounts to zero.
You can appeal the over-contribution tax but you will likely need an experienced tax dispute lawyer to do that for you, and depending on the amount at stake, it may not be worth your while to hire a lawyer.
The best thing to do is not to over-contribute to your TFSA in the first place.