CRA hits taxpayer with penalty for TFSA over-contribution

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Regardless of greater than a decade of collective expertise with tax-free financial savings accounts (TFSAs), Canadians are nonetheless unintentionally over-contributing to their accounts, and getting assessed an over-contribution penalty tax, which the Canada Revenue Agency appears more and more unwilling to forgive.

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Take the newest case of a British Columbia taxpayer who relied on info on the My Account section of the CRA’s web site to find out her TFSA contribution restrict. She misinterpreted the location’s info, and was hit with a penalty tax, which the CRA refused to waive, so she took the matter to courtroom. Earlier than delving into the small print of her case, let’s evaluation the TFSA contribution guidelines, the penalty for over-contributing and the out there cures. 

You possibly can contribute $6,000 to your TFSA for 2022. Relying in your age, your restrict might be as excessive as $81,500 in case you’ve by no means made a TFSA contribution earlier than, since unused room mechanically carries ahead from one calendar 12 months to the subsequent. You can even recontribute any TFSA withdrawals again into your TFSA, starting the calendar 12 months following the 12 months of withdrawal. 

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In the event you unintentionally 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 thirty days for every month you’re over your restrict. In the event you get assessed this tax, you may ask the CRA to waive or cancel it, which it has the facility to do if it may be established the tax arose “as a consequence of an inexpensive error” and the over-contribution is withdrawn from the TFSA “at once.”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 may take the matter to federal courtroom, the place a decide will decide whether or not the CRA’s determination 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 12 months, twice in 2011, twice in 2014, twice in 2015, and as soon as in 2016. In Might 2016, she obtained an “training letter” from the CRA displaying a contribution room restrict on December 31, 2015, of adverse $19,500. The letter acknowledged that the “adverse quantity means you contributed an excessive amount of.” She was advised 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 12 months 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 quick 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 “fully 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 info will not be up to date in actual time. Monetary establishments are required to electronically submit a TFSA report to the CRA by the final day of February, which exhibits all contributions and withdrawals for the prior 12 months. This knowledge 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 knowledge is uploaded to the system.  

On this case, the taxpayer additional defined that when she went to the web site, the data 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 data 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 might be up to date to account for extra info obtained by CRA. 

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The taxpayer, who misplaced her job in August 2020 throughout the pandemic, was financially supporting her son who was a full-time college scholar, who had additionally misplaced his job as a result of pandemic. As well as, her mom, who has a incapacity, lived along with her and was absolutely 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 reduction, writing: “Regardless that your TFSA extra contributions have been unintentional, we don’t think about misinterpreting your TFSA contribution restrict to be an inexpensive error. Below Canada’s self-assessment taxation system, people are answerable for understanding their TFSA accounts and their limits.” 

The taxpayer then took the matter to courtroom. At federal courtroom, the decide will not be permitted to alter the CRA’s determination even when they disagree with it. The courtroom solely wants to find out whether or not the CRA’s determination was “cheap,” which focuses on whether or not the choice was “intelligible, clear and justified.” 

The problem got here down as to if the taxpayer’s misunderstanding constituted a “cheap error.” The decide, in reviewing the CRA’s determination, 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 (Revenue 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 decide, though sympathetic in the direction of the taxpayer, nonetheless concluded that the CRA’s determination 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 Non-public Wealth in Toronto. [email protected] 

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