Following a discussion about her financial goals, your client Ms. Chen, 30, mentions she received a letter from the CRA stating she over-contributed to her TFSA by $2,000 last year. She mistakenly believed previous withdrawals would immediately restore her contribution room. As her advisor, what is the most appropriate action to advise her on regarding this over-contribution?

Question: Following a discussion about her financial goals, your client Ms. Chen, 30, mentions she received a letter from the CRA stating she over-contributed to her TFSA by $2,000 last year. She mistakenly believed previous withdrawals would immediately restore her contribution room. As her advisor, what is the most appropriate action to advise her on regarding this over-contribution?

Answer options: ✅ Immediately withdraw the excess $2,000 from her TFSA to stop further penalties and accurately report the over-contribution to the CRA.

• Wait for the CRA to contact her again with instructions, as they usually provide a grace period.
• Transfer the $2,000 to her RRSP, as this will offset the TFSA over-contribution penalty.
• Leave the funds in the TFSA, as the penalty is usually minimal and not worth the hassle of withdrawal.

Correct answer: Immediately withdraw the excess $2,000 from her TFSA to stop further penalties and accurately report the over-contribution to the CRA.

Explanation: Over-contributions to a TFSA are subject to a 1% penalty tax per month on the highest excess amount for each month the over-contribution remains. The most appropriate action is to promptly remove the excess funds to cease further penalties and inform the CRA.