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HomePersonal FinanceReal TFSA contribution mistake nonetheless results in CRA tax and penalty

Real TFSA contribution mistake nonetheless results in CRA tax and penalty

Jamie Golombek: He ran afoul of TFSA restrict and went to court docket to get CRA to rethink his case, and ended up disenchanted

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One of many best methods to remain on high of your tax-free financial savings account (TFSA) contribution restrict and keep away from an overcontribution penalty is to double-check your restrict on-line, which will be simply accomplished by logging on to Canada Income Company’s on-line portal for people referred to as My Account.

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There are a pair issues to remember. First, know that your TFSA contribution and withdrawal data shouldn’t be up to date in actual time and could also be outdated. Verify the “as of” date posted on-line alongside together with your TFSA room.

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Second, pay shut consideration to the quantity proven on the display, particularly if the quantity is in brackets, which means you’ve gotten a “unfavorable contribution restrict,” which might occur in case you have overcontributed in a previous calendar 12 months. A case determined earlier in June concerned a taxpayer who claimed to be confused by this bracketed quantity, ran afoul of his TFSA restrict and went to court docket to get a decide to order the CRA to rethink his case.

Earlier than delving into the case, let’s briefly evaluate the foundations. You may contribute $6,500 to your TFSA for 2023, and, relying in your age, your restrict may very well be as excessive as $88,000 in case you’ve by no means made a TFSA contribution earlier than and you’ve got been a resident of Canada since 2009, since unused room routinely carries ahead from one calendar 12 months to the following. It’s also possible to recontribute any TFSA withdrawals again into your TFSA, starting the calendar 12 months following the 12 months of withdrawal.

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When you unintentionally contribute to your TFSA past your most, you’ll be able to get hit with an overcontribution 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’ll be able to 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 overcontribution is withdrawn from the TFSA “directly.” If the CRA refuses to cancel the tax, you’ll be able to take the matter to federal court docket, the place a decide will decide whether or not the CRA’s choice to not waive the tax was affordable.

On this current case, the taxpayer started contributing to his TFSA in 2014. He overcontributed in 2015 and, consequently, the CRA in Could 2016 despatched him an “schooling letter” notifying him of his overcontribution, and telling him to withdraw the surplus contribution “instantly” to keep away from the penalty tax.

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Quick ahead to 2021 when the taxpayer as soon as once more overcontributed to his TFSA. In July 2022, the CRA notified him of his overcontribution by the use of a Discover of Evaluation, charging him with an overcontribution tax of $2,570.60, plus a penalty of $128.53, together with arrears curiosity.

The taxpayer subsequently requested to have the tax and penalties cancelled. The taxpayer defined he had consulted his profile on the CRA’s web site, which recognized his TFSA contribution room as “($18,459.99).” The taxpayer defined he interpreted this data to imply he had $18,459.99 in out there TFSA contribution room, “not realizing that the brackets round that determine indicated that he truly had a unfavorable contribution restrict, because of earlier overcontribution.” He informed the CRA agent he was taking steps to take away the surplus quantity.

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The Canada Revenue Agency headquarters in Ottawa.
The Canada Income Company headquarters in Ottawa. Picture by Sean Kilpatrick/The Canadian Press

In August 2022, the CRA denied his first request to cancel the tax, explaining that his circumstances “didn’t represent an inexpensive error.” The CRA mentioned the taxpayer had already acquired an schooling letter in 2016 attributable to a earlier TFSA overcontribution, and it was the taxpayer’s accountability to withdraw any extra contributions and “to maintain and evaluate correct data to make sure” he stays inside his TFSA contribution room.

The next month, the taxpayer requested a second impartial evaluate by a special CRA officer. In his letter to the CRA, he mentioned he shouldn’t be blamed for his overcontribution as he “was not conscious {that a} contribution restrict displayed in brackets signifies a unfavorable quantity (i.e., an extra) and that, upon studying of his overcontribution, he promptly eliminated the surplus quantity from his TFSA account.”

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The taxpayer additionally mentioned that when he referred to as the CRA to resolve the difficulty, the CRA agent admitted that nowhere within the TFSA contribution room part does it state {that a} worth in brackets means a unfavorable quantity. He additionally mentioned he couldn’t recall his 2015 TFSA overcontribution, saying “it should have been a mistake, as a result of he’s an sincere taxpayer.”

The CRA once more denied the taxpayer’s request, so the taxpayer took the matter to Federal Court docket to ask a decide to find out whether or not the CRA officer’s refusal to train their discretion and cancel the overcontribution tax was “affordable.”

The CRA officer acknowledged the taxpayer’s request for aid resulted from him not understanding the which means of the brackets across the quantity proven on the CRA web site. Nonetheless, the officer famous “it’s the accountability of every TFSA account holder to concentrate on the foundations and rules governing TFSAs and to handle their TFSA accordingly, together with understanding that using brackets represents unfavorable contribution room.”

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The decide had little doubt that the taxpayer was performing truthfully and his overcontribution was primarily based on a “real misunderstanding” as to how a lot TFSA contribution room he had. However, in the end, a taxpayer’s contribution room, and whether or not they’re in an overcontribution place, is a perform of contributions and withdrawals made by that taxpayer. It’s not depending on whether or not a taxpayer understands the data on a web site.

Because the taxpayer’s contribution data is “inside the information, or the means of data, of the taxpayer,” the decide concluded the CRA’s reasoning in denying the taxpayer’s request for aid was “intelligible” and affordable, and dismissed the taxpayer’s software for judicial evaluate.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Non-public Wealth in Toronto.


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