CRA controversy shows Canadians still don’t know the rules for TFSAs

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Two new federal court decisions handed down earlier this month show that some taxpayers continue to make mistakes when it comes to contributing to tax-free savings accounts.

Each case had its own unique facts and circumstances, but in both cases the taxpayers failed to understand the contribution limits and the need to withdraw excess contributions promptly in a timely manner if they expected any relief from the Canada Revenue Agency.

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Let’s review the basic rules: The penalty for overcontributing to a TFSA is 1 percent for each month you exceed the limit. If you’re charged a TFSA overcontribution tax, you can ask the CRA to waive or cancel it. The CRA has the power to waive or cancel it if you can prove that the tax occurred “as a result of a reasonable error” and that the overcontributions were withdrawn from your TFSA “without undue delay.” If the CRA refuses to cancel the tax, you can appeal to Federal Court, where a judge will decide whether the CRA’s decision not to waive the tax was reasonable.

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In the first case, the taxpayer, who represented himself, got off to a false start by appealing the overcontribution tax to the Tax Court, which was the wrong court that did not have the authority to set aside TFSA overcontribution taxes. The Tax Court therefore dismissed the case, and the taxpayer then took the case to the appropriate court, the Federal Court.

This taxpayer’s issues date back to 2019, when she contributed $34,600 to her TFSA. Her TFSA contribution limit for that year was $34,620. On January 1, 2020, she had an additional $6,000 available to contribute, which, combined with the $20 she carried over from 2019, brought her 2020 limit to $6,020. The taxpayer contributed $40,620 to her TFSA in January 2020 and another $6,020 in April 2020.

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In July 2021, the CRA issued a TFSA Notice of Assessment (NOA) for 2020 informing taxpayers that they owe $7,308 in penalty taxes and interest. The NOA was issued electronically and posted to CRA My Account, and notifications were sent via email.

The taxpayer claimed she never received or saw the email, explaining that because she was “in position to receive a refund” every year, “her disregard for the CRA (email) is not the same as that of people who have to pay taxes all the time.”

Fast forward to February 2022, and halfway through filing her 2021 tax return, the taxpayer logged into her online CRA account and realized for the first time that she had overcontributed to her TFSA. She immediately withdrew most of the overcontributions and applied for a waiver of the penalty taxes and interest.

She said she mistakenly thought she had not used her 2019 and 2020 TFSA contributions and accidentally contributed $40,620 in January 2020. She then mistakenly contributed another $6,020 in April 2020, forgetting that she had already contributed to her 2020 TFSA in January.

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She also said she had “experienced difficult personal circumstances in 2019 and 2020 with the death of my father in 2019, caring for my elderly mother, increased work responsibilities, and now the pandemic.” She also noted that she had not seen the 2020 NOA when it was issued.

The taxpayer’s initial claim for relief was denied because the CRA noted that the TFSA excess contributions were not fully removed in a timely manner. The CRA then issued a second TFSA NOA, this time for the 2021 tax year, assessing an additional $9,718 in excess contribution penalty tax and interest.

The taxpayer submitted a second application seeking exemption from tax and interest, explaining that the overcontribution was unintentional and that he withdrew it on the same day that he became aware of the overcontribution when he checked his account online in February 2022.

The CRA denied her second request for relief because it did not believe the overcontributions were reversed “without undue delay.” The CRA interprets “without undue delay” as within 30 days of notice. Because the taxpayer reversed the overcontributions 221 days after the 2020 NOA was sent, that was not fast enough. The fact that she did not see the 2020 NOA posted to her online account and the notice was emailed to her is no excuse.

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“It is (taxpayers’) responsibility to ensure that the email address they provide to the CRA is correct at all times,” the agency said.

The judge found that the CRA’s decision not to waive the tax and interest was reasonable because “individuals would be expected to immediately amend and manage their TFSA accounts within the contribution limits after receiving their assessment notice.”

The second TFSA overcontribution case involved a taxpayer who had a 2021 contribution limit of $75,521 but instructed a financial institution to transfer $293,251 worth of stocks from an investment account to his TFSA, resulting in an overcontribution of $217,730. In July 2022, the CRA assessed overcontribution tax, penalties and interest of $10,960 on the 2021 overcontribution to his TFSA.

In September 2022, the taxpayer wrote to the CRA requesting a waiver of taxes, penalties and interest, explaining that she was “unaware” of the contribution limit when she transferred all of her stocks into a TFSA in 2021. She withdrew the excess from her TFSA in October 2022.

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The CRA concluded that the three-month delay from the date of the NOA to her withdrawing the excess contributions was “outside a reasonable period of time.”

The judge found that the CRA’s decision was reasonable and therefore there was no reason to remand the case back to the CRA for reconsideration.

Thus, the taxes, penalties and interest were upheld.

Jamie Golombek He is FCPA, FCA, CFP, CLU and TEP certified and is Managing Director of Tax and Estate Planning at CIBC Private Wealth in Toronto. jamie.golombek@cibc.com.

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