Jamie Golombek: The Canada Income Company appears more and more unwilling to forgive TFSA over-contributions
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Regardless of greater than a decade of collective expertise with tax-free financial savings accounts (TFSAs), Canadians are nonetheless by chance over-contributing to their accounts, and getting assessed an over-contribution penalty tax, which the Canada Income Company appears more and more unwilling to forgive.
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Take the most recent case of a British Columbia taxpayer who relied on data on the My Account part of the CRA’s web site to find out her TFSA contribution restrict. She misinterpreted the location’s data, and was hit with a penalty tax, which the CRA refused to waive, so she took the matter to court docket. Earlier than delving into the small print of her case, let’s evaluate the TFSA contribution guidelines, the penalty for over-contributing and the accessible treatments.
You’ll be able to contribute $6,000 to your TFSA for 2022. Relying in your age, your restrict may very well be as excessive as $81,500 in the event you’ve by no means made a TFSA contribution earlier than, since unused room mechanically carries ahead from one calendar yr to the following. You may also recontribute any TFSA withdrawals again into your TFSA, starting the calendar yr following the yr of withdrawal.
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When you by chance contribute to your TFSA past your most, you may get hit with an over-contribution penalty tax that is the same as one per cent per 30 days for every month you’re over your restrict. When you get assessed this tax, you possibly can ask the CRA to waive or cancel it, which it has the ability to do if it may be established the tax arose “as a consequence of an inexpensive error” and the over-contribution is withdrawn from the TFSA “at once.” If the CRA refuses to cancel the tax, you possibly can take the matter to federal court docket, the place a choose will decide whether or not the CRA’s choice to not waive the tax was cheap.
On this most up-to-date TFSA over-contribution case, the taxpayer initially opened her first TFSA in 2009, contributing as soon as that yr, twice in 2011, twice in 2014, twice in 2015, and as soon as in 2016. In Could 2016, she obtained an “training letter” from the CRA displaying a contribution room restrict on December 31, 2015, of detrimental $19,500. The letter acknowledged that the “detrimental quantity means you contributed an excessive amount of.” She was instructed to withdraw the quantity instantly to keep away from the one-per-cent month-to-month tax, which she did, and no penalty tax was assessed.
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Quick ahead to 2019, and the taxpayer’s TFSA contribution room restrict stood at $7,849, however she made TFSA contributions that yr totalling $26,002. This once more caught the eye of the CRA who in July 2020 despatched 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 fast motion and eliminated the surplus TFSA contribution. She then wrote to the CRA to request it waive the tax. In her letter, she stated she “utterly misunderstood the correct quantity I ought to contribute.” She made two contributions, one in January 2019 and one other in February 2019, primarily based on the quantity proven in January 2019 on her “My Account” web page on the CRA’s web site.
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The issue, nonetheless, is that the CRA My Account TFSA data just isn’t up to date in actual time. Monetary establishments are required to electronically submit a TFSA document to the CRA by the final day of February, which reveals all contributions and withdrawals for the prior yr. This information might not be up to date on-line till April, so a taxpayer logging into My Account in January 2022, for instance, could solely see their TFSA transactions from 2020 and prior years, till the 2021 information is uploaded to the system.
On this case, the taxpayer additional defined that when she went to the web site, the knowledge displayed confirmed she had sufficient room to make the contributions to her TFSA, so she made two contributions in January and February 2019. She argued that she made a “cheap error” as a result of her over-contributions have been primarily based on the knowledge displayed on My Account, the supply of which was the CRA. She defined that when she made these contributions, she didn’t know that the “Contribution Room” quantities as displayed on My Account may very well be up to date to account for extra data obtained by CRA.
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The taxpayer, who misplaced her job in August 2020 through the pandemic, was financially supporting her son who was a full-time college pupil, who had additionally misplaced his job because of the pandemic. As well as, her mom, who has a incapacity, lived together with her and was totally depending on her financially. She stated the over-contribution tax “was unfair and positioned undue hardship on her. The quantity of curiosity earned on the surplus contribution was lower than $400 …whereas the tax assessed on the TFSA over-contribution exceeded $1,700.”
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Regardless of this, the CRA denied her request for aid, writing: “Although your TFSA extra contributions have been unintentional, we don’t contemplate misinterpreting your TFSA contribution restrict to be an inexpensive error. Below Canada’s self-assessment taxation system, people are accountable for understanding their TFSA accounts and their limits.”
The taxpayer then took the matter to court docket. At federal court docket, the choose just isn’t permitted to vary the CRA’s choice even when they disagree with it. The court docket solely wants to find out whether or not the CRA’s choice was “cheap,” which focuses on whether or not the choice was “intelligible, clear and justified.”
The difficulty got here down as to if the taxpayer’s misunderstanding constituted a “cheap error.” The choose, in reviewing the CRA’s choice, acknowledged that “it was moderately open to CRA to conclude that the (taxpayer) didn’t make a ‘cheap error’ … As is well-known, the Canadian tax system is a self-reporting system. It depends on taxpayers to adjust to the (Earnings Tax Act) … For TFSA functions, the taxpayer is accountable to concentrate on their contribution limits and to make sure that their contributions adjust to relevant guidelines.”
The choose, though sympathetic in the direction of the taxpayer, nonetheless concluded that the CRA’s choice to not waive the penalty tax was cheap, successfully upholding penalty tax.
Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Personal Wealth in Toronto. Jamie.Golombek@cibc.com
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