Excess TFSA contributions from past can stay if you've gained room since
Excess contributions to a taxfree savings account and how to minimize the tax hit of a large capital gain were among the topics raised in reader questions this week.
Q I received a notice from Canada Revenue Agency last month telling me I had overcontributed $6,000 to my TFSA in 2019 and to withdraw the excess funds immediately or risk a tax and penalties. Since I didn't contribute to my TFSA last year or this, do I still need to make the withdrawal to keep them happy? And why did it take them so long to advise me? A You don't need to pull out the money, since you gained an additional $6,000 in contribution room in 2020 and this year, but CRA says you could be taxed for the months in 2019 that you were over your limit. The typical penalty is one per cent a month, with the possibility of an additional `“advantage tax'' if the overcontribution produces significant gains. That's why it's important to keep track of TFSA contributions. CRA uses information submitted by TFSA administrators to determine if taxpayers are in compliance, so that may be the source of the delay.
Q I'm looking at a large capital gain from shares in a publicly-traded company where I worked from 1997 to 2001 and where I was enrolled in a stock purchase and reinvestment plan. Is there any way to minimize the tax hit when I sell, say by transferring shares to my TFSA, which I've barely used? I'm in a high tax bracket already. I also don't have records of my average purchase price during the employment years, though I've kept track of the dividends and reinvestment prices since then.
A A large gain on paper is a pleasant dilemma, but not having detailed and accurate records of your acquisition costs could be a major headache. If you make an estimate, you may have to justify your numbers to tax officials, so try to be as accurate as possible, which means doing some homework. Start by asking the company in question if it has records on share prices during your period of employment and try to arrive at a realistic cost base for your investment. Once you've determined your average cost per share, you have a few options. If you want to stay invested, you can transfer shares to your TFSA, provided their market value does not exceed your TFSA contribution limit. It will be treated as a disposition and you'll need to pay capital gains tax on the appreciation in value of those shares at the time of the transfer, but any further gains within the TFSA will be tax-free. If you have capital losses from other transactions or current holdings in a loss position, you could use them to offset an equivalent amount of capital gains from selling some shares of the stock that's done so well. You also have the option of donating shares to charity, which will produce tax deductions for charitable contributions with no capital gains tax. If you can wait until retirement, you might want to consider cashing in the gains systematically over a period of years, possibly as a substitute for Old Age Security or Quebec Pension Plan cheques, which can be put off until 70 with a nice bonus for doing so.
Q My wife is retired and planning to start collecting her Quebec Pension Plan benefits at age
65. I'm still working and intend to continue doing so until age
69. I would start taking QPP at age 70, receiving the 42 per cent increase for waiting. What would be the effect on the QPP Survivor Benefit of this scenario?
A The survivor benefit can boost the QPP pension of a spouse by as much as 60 per cent if their partner dies, but it can also increase it by little (or nothing) depending on the circumstances. If your wife started collecting at QPP at 65, the highest combined amount that she could receive would be the maximum benefit that year for someone applying at age 65 (in 2021, it's $1,208.26). If she waited until age 70, the threshold would be 42 per cent higher (it's $1,715.73 this year). If she worked most of her life and is eligible for a monthly cheque in the vicinity of the QPP maximum, the survivor benefit wouldn't be a large sum regardless of when she applied. But if she is well below the maximum, it could represent hundreds more dollars a month in the event of your passing. There is also a death benefit of $2,500 payable to the heirs or the person who paid the funeral expenses of a QPP recipient, which is taxable to the estate of the deceased.