With CRA and TFSA rules, ignorance not an excuse for overcontributions

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As we wade by tax season anxiously awaiting these closing few T5 and T3 slips for 2023 to reach, we should always guarantee we’ve taken full benefit of the contribution room accessible to us in all of the various registered plans as a way to decrease the quantity of taxable funding revenue we’ll must report in future years.

With the cumulative tax-free savings account (TFSA) contribution room probably as excessive as $95,000 in 2024 (assuming you had been 18 and a resident of Canada since 2009), and this yr’s annual greenback restrict set at $7,000, there’s actually no excuse for anybody to have any non-registered taxable investments for those who haven’t totally maximized your cumulative TFSA contributions.

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You possibly can test your TFSA contribution restrict on-line by logging on to the Canada Revenue Agency’s on-line portal for people referred to as My Account. However be mindful your TFSA contribution and withdrawal data will not be up to date in actual time and could also be outdated. Examine the “as of” date posted on-line alongside your TFSA room.

The explanation for vigilance is to keep away from the overcontribution penalty tax, which is the same as one per cent per 30 days for every month you’re over your restrict. A one per cent tax doesn’t look like quite a bit, however the tax is one per cent per 30 days for every month you’re over the restrict till the overcontribution is withdrawn — that’s 12 per cent per yr.

If you happen to do get hit with a TFSA penalty tax, you may request the CRA to waive or cancel it, which the company has the facility to do if it may be established the tax arose “as a consequence of an inexpensive error,” and the overcontribution is withdrawn from the TFSA “immediately.” If the CRA refuses to cancel the tax, you may take the matter to Federal Courtroom, the place a choose will decide whether or not the CRA’s choice to not waive the tax was “cheap.”

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The newest choice involving a TFSA overcontribution involved a taxpayer who was assessed practically $11,000 in penalty taxes, plus a late-filing penalty and arrears curiosity.

The taxpayer first opened a TFSA account in 2010, however solely actually began to “use it” in 2020. She testified that as a result of onset of COVID-19, she needed to take day off work to look after her daughter. Round that point, she determined to do some investing inside her TFSA and used her financial savings and a few cash lent to her from members of the family.

As of Jan. 1, 2020, the taxpayer’s TFSA contribution restrict was $68,113. Throughout 2020, she contributed $396,400 and made withdrawals totalling $299,296. Consequently, given her restrict of $68,113 at the start of 2020, she had overcontributed by $28,990 by the top of the yr.

The CRA in July 2021 issued the taxpayer a TFSA Discover of Evaluation (NOA) for the 2020 taxation yr indicating she owed $10,815 in penalty tax primarily based on her extra contributions to her TFSA for 2020, plus a late-filing penalty cost and arrears curiosity.

The taxpayer in January 2022 formally requested the CRA cancel the tax assessed on her extra TFSA contributions, noting that she “didn’t have adequate data relating to the foundations governing using TFSAs, and that she thought {that a} TFSA operated in the identical method as a daily financial savings account.” She added that she referred to as the CRA to acquire additional data as soon as she grew to become conscious of her extra contribution.

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The CRA denied the taxpayer’s preliminary request for reduction, noting {that a} “lack of know-how of taxation guidelines can’t be thought of past a taxpayer’s management as data is available on (the CRA’s) web site and thru (its) basic inquiries phone line.”

The CRA officer additional famous “it’s the duty of the taxpayer to pay attention to the foundations governing the administration of their TFSA,” and identified the taxpayer had held the TFSA for greater than a decade earlier than the overcontribution in 2020 occurred.

The CRA in July 2022 despatched the taxpayer a second TFSA NOA, this time for the 2021 taxation yr, notifying her she now owed $14,748 in connection along with her remaining extra TFSA contributions from 2020, a few of which remained unwithdrawn in 2021, plus extra curiosity and penalties.

The next month, the taxpayer wrote to the CRA requesting it to evaluation its preliminary choice to disclaim her reduction, reiterating she was “unaware of the foundations, however had sought to right her error.” She mentioned she had contacted the CRA in reference to the NOA, however was suggested to withdraw solely the surplus quantity by the top of the yr.

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In the meantime, curiosity on the unique quantity owed was persevering with to accrue. She added that she had misplaced the cash invested by her TFSA, was on maternity go away, had not returned to the office for child-care and pandemic-related causes, and didn’t have the power to pay.

Quick ahead to February 2023 when her case was reviewed by a second CRA officer, who once more denied the taxpayer’s request to cancel the penalty tax, citing a number of causes. The primary was that the taxpayer had held her TFSA since 2010 and may have been familiarized with the foundations.

As well as, her lack of know-how of the foundations can’t be thought of as one thing “past her management” as a result of such data and assets are broadly accessible. The officer additionally famous the taxpayer was suggested of the overcontribution in July of 2021, however solely took steps to withdraw the surplus quantities in 2022. This was not, within the view of the CRA, “inside an inexpensive timeframe.”

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After being denied reduction for the second time, the taxpayer appealed to the Federal Courtroom in search of a judicial evaluation of the CRA’s choice to not forgive the penalty tax. In these instances, the court docket’s function is to find out whether or not the CRA officer’s choice was cheap.

On this case, the choose concluded it was. “A taxpayer’s lack of know-how or misunderstanding doesn’t render a CRA’s discretionary choice to not grant tax reduction … (to be) unreasonable,” she mentioned.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Personal Wealth in Toronto. Jamie.Golombek@cibc.com.

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