CRA disputes show Canadians still don’t know TFSA rules

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Two new Federal Court decisions decided earlier this month demonstrate that some taxpayers continue to mess up when it comes to tax-free savings account contributions.

Each case had its own set of facts and circumstances, but the taxpayers in both cases failed to understand their contribution limits and the need to expeditiously withdraw any overcontributions in a timely manner if they were to have any hope for relief from the Canada Revenue Agency.

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Let’s review the basic rules. The penalty for overcontributing to your TFSA is one per cent per month for each month you’re over your limit. If you get assessed with a TFSA overcontribution tax, you can ask the CRA to waive or cancel it, which the agency has the power to do if it can be established the tax arose “as a consequence of a reasonable error” and the overcontribution is withdrawn from your TFSA “without delay.” If the CRA refuses to cancel the tax, you can take the matter to federal court, where a judge will determine whether the agency’s decision not to waive the tax was reasonable.

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In the first case, the taxpayer, who was self-represented, started off on the wrong foot by appealing the overcontribution tax to the Tax Court, which was the wrong court as it has no jurisdiction to cancel the TFSA overcontribution tax. The Tax Court, accordingly, dismissed the case, and the taxpayer then brought her case to the proper court, the Federal Court.

The taxpayer’s troubles can be traced back to 2019, when she made a $34,600 contribution to her TFSA. Her TFSA contribution room that year was $34,620. On Jan. 1, 2020, another $6,000 of new contribution room opened up, and combined with the $20 carried forward from 2019, that meant her limit for 2020 was $6,020. The taxpayer proceeded to contribute $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 the 2020 tax year, informing the taxpayer that she was required to pay $7,308 in penalty tax and interest. This NOA was issued electronically, posted to her CRA My Account, with a notification sent via e-mail.

The taxpayer claimed not to have received or to ever have seen the e-mail, explaining that since she normally was in a “refund position” each year, “her inattention to CRA (e)mails is not the same as those who always have to pay taxes.”

Fast forward to February 2022, when, in the course of filing her 2021 return, the taxpayer logged on to her online CRA account to only then discover her TFSA overcontribution. She immediately withdrew most of the overcontribution and submitted a request to waive the penalty tax and interest.

She stated that she had accidentally contributed the $40,620 in January 2020, mistakenly believing she had not used her contribution room from 2019 and 2020. She then accidentally contributed a further $6,020 in April 2020 after forgetting she already made her new 2020 TFSA room contribution back in January.

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She also said “she was experiencing difficult personal circumstances in 2019 and 2020 due to her father’s death in 2019, taking care of her aging mother, increased work responsibilities and the pandemic.” She also noted that she did not see the 2020 NOA when it was issued.

The taxpayer’s first request for relief was denied as the CRA noted that the excess TFSA contributions were not fully removed in a timely manner. The CRA then followed up with a second TFSA NOA, this time for the 2021 tax year, assessing her a further $9,718 in overcontribution penalty tax and interest.

The taxpayer submitted a second request to waive the tax and interest, explaining that the overcontributions were not intentional and that she withdrew the overcontribution on the same day she became aware of it, that being when she checked her My Account online in February 2022.

The CRA denied her second request for relief as it did not feel the overcontributions were withdrawn “without delay.” The CRA interprets “without delay” as within 30 days of notification. Since the taxpayer withdrew the excess contributions 221 days after the 2020 NOA was sent, it was not done fast enough. The fact that she failed to see her 2020 NOA, which was posted to her online account and for which she was sent an email notification about it, was not an excuse.

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“It’s (the taxpayer’s) responsibility to ensure that the email address provided to 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 since there is “an expectation that individuals will immediately correct and manage their TFSA accounts within their contribution room limit after being informed by a notice of assessment.”

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

In September 2022, the taxpayer wrote to the CRA to request a waiver of the tax, penalty and interest, explaining she was “unaware” of her contribution room limit when she forwarded all her stocks to her TFSA in 2021. She withdrew the TFSA excess in October 2022.

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The CRA concluded that the three-month delay from the date of the NOA to the time she withdrew the overcontribution was “outside a reasonable timeframe.”

The judge found the CRA’s decision to be reasonable, so it had no reason to send the case back to the CRA for redetermination.

The tax, penalty and interest were therefore upheld.

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

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