CRA’s TFSA rules land two more taxpayers in hot water

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The tax-free financial savings account (TFSA) was launched again in 2009 and designed to be a really simple financial savings car. You contribute after-tax {dollars} to the account and make investments them in just about something, with any progress contained in the account being tax free. You may withdraw funds everytime you need, for any goal. If that’s not sufficient, the complete truthful market worth of no matter you withdraw may be recontributed starting the next calendar yr.

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With all these advantages, and the simplicity inherent within the account design, what may presumably go fallacious? Rather a lot judging by the variety of circumstances we’ve seen over the previous decade for the reason that TFSA’s launch. Some circumstances contain penalties charged for accidental TFSA overcontributions, whereas others concerned taxpayers who got caught by the TFSA advantage rules.

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Let’s take a look at two latest circumstances, one involving a taxpayer who overcontributed, and one that includes a taxpayer who challenged the constitutionality of the TFSA’s 100-per-cent benefit tax.

The primary case concerned an 83-year-old, self-represented Saskatchewan taxpayer who took the Canada Revenue Agency (CRA) to court docket over his TFSA overcontributions. As a reminder, if you happen to unintentionally overcontribute to your TFSA past your most, you will get hit with an overcontribution penalty tax that is the same as one per cent monthly for every month you’re over the restrict.

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You may ask the CRA to waive or cancel this penalty tax if it may be established that it arose “as a consequence of an inexpensive error” and the overcontribution is withdrawn from the TFSA “directly.” If the CRA refuses to cancel the tax, you possibly can take the matter to federal court docket, the place a decide will decide whether or not the CRA’s resolution to not waive the tax was cheap. That’s precisely what the taxpayer did on this most up-to-date case.

The taxpayer admitted to unknowingly overcontributing to his TFSA throughout 2016 and 2017. On Jan. 1, 2016, the taxpayer had TFSA contribution room of roughly $27,500, however contributed $46,500 that yr, exceeding his contribution room by $19,000. Consequently, the CRA in July 2017 issued a Discover of Evaluation in respect of his TFSA overcontribution for the 2016 taxation yr and charged him a penalty tax.

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The 2017 TFSA greenback restrict was $5,500, so on Jan. 1, 2017, he exceeded his contribution room by $13,500. The CRA in July 2018 issued the taxpayer a second Discover of Evaluation in respect of his TFSA overcontribution for the 2017 taxation yr, once more charging a penalty tax.

For 2018, the TFSA greenback restrict was additionally $5,500, so he exceeded his contribution room by $8,000 on Jan. 1, 2018. In a letter despatched in September 2018, the TFSA Processing Unit on the CRA beneficial the taxpayer withdraw the surplus contributions from his TFSA as quickly as doable to cease the month-to-month one-per-cent penalty tax from persevering with, and the taxpayer on Oct. 1, 2018, withdrew $9,000 from his TFSA.

Every week later, the taxpayer submitted a primary request for taxpayer reduction for his TFSA overcontribution, claiming he was not liable for the error as a result of he was not knowledgeable by his financial institution or the CRA that he was overcontributing. He additionally claimed he was unaware that withdrawals he constituted of his TFSA had been solely added to his contribution room the next calendar yr.

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In January 2019, the CRA denied his request for reduction, so the taxpayer requested for a second-level assessment, which was once more denied in June 2019. In denying the second request, the CRA officer famous the taxpayer didn’t take away the surplus contributions from his TFSA for 2016 and 2017 till Oct. 1, 2018, which was not quick sufficient.

The taxpayer then turned to the Federal Courtroom, asking it to assessment whether or not the CRA’s resolution denying him reduction was cheap. In court docket, the taxpayer’s main argument was that the CRA failed “to manage the earnings tax system pretty and fairly.”

He defined he didn’t instantly withdraw his extra TFSA contributions as a result of he was ready for responses from the CRA to his questions. He additionally felt the CRA has “an obligation of care to have a system that doesn’t permit overcontribution.”

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However these arguments, the decide discovered the CRA had moderately responded to his questions. She concluded the CRA officer’s resolution to disclaim penalty tax reduction was cheap. “Though (the taxpayer) was notified of his overcontributions, he didn’t act directly to take away the surplus contributions from his TFSA,” the decide stated.

The second latest case involving the TFSA penalty tax was on the Tax Courtroom and anxious the “advantage rules,” which are a series of anti-avoidance rules in the Income Tax Act designed to forestall abuse and manipulation of all registered plans, together with TFSAs. If you end up offside these guidelines, you could possibly face a 100-per-cent penalty tax on the truthful market worth of any “benefit” you obtain that’s associated to a registered plan.

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On this case, the taxpayer was interesting reassessments by the CRA on his TFSA ensuing from the benefit he acquired concerning the switch of personal firm shares to his TFSA. The taxpayer requested the court docket to find out whether or not the penalty tax was a penalty or a tax, and whether or not it must be declared unconstitutional as a consequence of Parliament having improperly delegated the rate-setting component of that tax to the CRA, in contravention of the Structure Act.

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Maybe not surprisingly, the court docket, after a prolonged authorized evaluation, held that the benefit tax is, certainly, a tax and, moreover, is validly imposed. It additionally concluded it’s not unconstitutional, for the reason that CRA doesn’t set the tax price; it merely has the discretion to waive or cancel “all or a part of the tax.” Because the court docket wrote, “No matter delegation of taxation energy there could also be is merely, ministerial discretion, itself sufficiently constrained to permitted administrative duties.”

The taxpayer has appealed this resolution to the Federal Courtroom of Enchantment, which is able to doubtless hear the case someday in 2023.

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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