Jamie Golombek: The Canada Revenue Agency seems increasingly unwilling to forgive TFSA over-contributions
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Despite more than a decade of collective experience with tax-free savings accounts (TFSAs), Canadians are still accidentally over-contributing to their accounts, and getting assessed an over-contribution penalty tax, which the Canada Revenue Agency seems increasingly unwilling to forgive.
Take the latest case of a British Columbia taxpayer who relied on information on the My Account section of the CRA’s website to determine her TFSA contribution limit. She misinterpreted the site’s information, and was hit with a penalty tax, which the CRA refused to waive, so she took the matter to court. Before delving into the details of her case, let’s review the TFSA contribution rules, the penalty for over-contributing and the available remedies.
You can contribute $6,000 to your TFSA for 2022. Depending on your age, your limit could be as high as $81,500 if you’ve never made a TFSA contribution before, since unused room automatically carries forward from one calendar year to the next. You can also recontribute any TFSA withdrawals back into your TFSA, beginning the calendar year following the year of withdrawal.
If you accidentally contribute to your TFSA beyond your maximum, you can get hit with an over-contribution penalty tax that is equal to one per cent per month for each month you’re over your limit. If you get assessed this tax, you can ask the CRA to waive or cancel it, which it has the power to do if it can be established the tax arose “as a consequence of a reasonable error” and the over-contribution is withdrawn from the TFSA “without delay.” If the CRA refuses to cancel the tax, you can take the matter to federal court, where a judge will determine whether the CRA’s decision not to waive the tax was reasonable.
In this most recent TFSA over-contribution case, the taxpayer originally opened her first TFSA in 2009, contributing once that year, twice in 2011, twice in 2014, twice in 2015, and once in 2016. In May 2016, she received an “education letter” from the CRA showing a contribution room limit on December 31, 2015, of negative $19,500. The letter stated that the “negative amount means you contributed too much.” She was told to withdraw the amount immediately to avoid the one-per-cent monthly tax, which she did, and no penalty tax was assessed.
Fast forward to 2019, and the taxpayer’s TFSA contribution room limit stood at $7,849, but she made TFSA contributions that year totalling $26,002. This again caught the attention of the CRA who in July 2020 sent her a letter advising that she had over-contributed to her TFSA by $18,153, assessing her with penalty tax of $1,784.
Upon receiving the CRA’s letter, the taxpayer took immediate action and removed the excess TFSA contribution. She then wrote to the CRA to request it waive the tax. In her letter, she said she “completely misunderstood the accurate amount I should contribute.” She made two contributions, one in January 2019 and another in February 2019, based on the amount shown in January 2019 on her “My Account” page on the CRA’s website.
The problem, however, is that the CRA My Account TFSA information is not updated in real time. Financial institutions are required to electronically submit a TFSA record to the CRA by the last day of February, which shows all contributions and withdrawals for the prior year. This data may not be updated online until April, so a taxpayer logging into My Account in January 2022, for example, may only see their TFSA transactions from 2020 and prior years, until the 2021 data is uploaded to the system.
In this case, the taxpayer further explained that when she went to the website, the information displayed showed she had enough room to make the contributions to her TFSA, so she made two contributions in January and February 2019. She argued that she made a “reasonable error” because her over-contributions were based on the information displayed on My Account, the source of which was the CRA. She explained that when she made these contributions, she did not know that the “Contribution Room” amounts as displayed on My Account could be updated to account for additional information received by CRA.
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The taxpayer, who lost her job in August 2020 during the pandemic, was financially supporting her son who was a full-time university student, who had also lost his job due to the pandemic. In addition, her mother, who has a disability, lived with her and was fully dependent on her financially. She said the over-contribution tax “was unfair and placed undue hardship on her. The amount of interest earned on the excess contribution was less than $400 …whereas the tax assessed on the TFSA over-contribution exceeded $1,700.”
Despite this, the CRA denied her request for relief, writing: “Even though your TFSA excess contributions were unintentional, we do not consider misinterpreting your TFSA contribution limit to be a reasonable error. Under Canada’s self-assessment taxation system, individuals are responsible for understanding their TFSA accounts and their limits.”
The taxpayer then took the matter to court. At federal court, the judge is not permitted to change the CRA’s decision even if they disagree with it. The court only needs to determine whether the CRA’s decision was “reasonable,” which focuses on whether the decision was “intelligible, transparent and justified.”
The issue came down to whether the taxpayer’s misunderstanding constituted a “reasonable error.” The judge, in reviewing the CRA’s decision, stated that “it was reasonably open to CRA to conclude that the (taxpayer) did not make a ‘reasonable error’ … As is well known, the Canadian tax system is a self-reporting system. It relies on taxpayers to comply with the (Income Tax Act) … For TFSA purposes, the taxpayer is responsible to be aware of their contribution limits and to ensure that their contributions comply with applicable rules.”
The judge, although sympathetic towards the taxpayer, nonetheless concluded that the CRA’s decision not to waive the penalty tax was reasonable, effectively upholding penalty tax.
Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com
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