CRA tries to catch taxpayer who made incorrect TFSA contribution

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The tax-free financial savings quantity (TFSA) contribution restrict on Jan. 1, 2023, will lastly improve by $500 to achieve $6,500, marking the primary time since 2019 that this restrict has been elevated.

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That’s as a result of in 2015, the federal government introduced the annual TFSA restrict can be mounted at $5,000, listed to inflation for every year after 2009, however rounded to the closest $500. In different phrases, solely as soon as the cumulative listed annual contribution restrict exceeded $6,250 (which it did in 2022) was the restrict bumped up by $500 to $6,500, from $6,000.

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For somebody who has by no means contributed to a TFSA, the brand new cumulative restrict on Jan. 1, 2023, will likely be $88,000. However in an effort to get entry to that complete TFSA restrict, a person should have been a resident of Canada, and no less than 18 years of age, since 2009. A tax case determined earlier this month demonstrates what can go improper for those who make a lump-sum TFSA catch-up contribution past what you might be entitled to contribute.

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The taxpayer’s troubles started in December 2019 when she had a assured funding certificates (GIC) coming due. A monetary adviser at her financial institution suggested her to make use of the proceeds to buy one other GIC and deposit it right into a TFSA. She adopted that recommendation and contributed $63,500 to a TFSA, placing in an extra $6,000 in January 2020, when the brand new 2020 contribution room turned accessible. She stated this represented her complete financial savings on the financial institution.

On Jan. 31, 2020, the taxpayer flew to the Dominican Republic anticipating to be there for 3 months, however the world pandemic modified her plans and flights between the 2 nations have been suspended. She was unable to return to Canada till June 25, 2021, the place she needed to quarantine for 14 days earlier than returning to her residence in Prince Edward Island.

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Whereas she was away, she requested a pal to take photos of her mail, which have been then despatched to her residence so she may ask that that these unknown to her be opened.

The Canada Income Company despatched the taxpayer an “instructional letter” dated June 4, 2020, that knowledgeable her she had overcontributed to her TFSA by $15,000, and instructed her she wanted to “withdraw the surplus quantity immediately.”

Sadly, the taxpayer’s pal did not ship her an image of the envelope containing the CRA’s letter, so she was unaware of it (and the truth that she had overcontributed to her TFSA) till she returned to P.E.I.

After lastly opening the CRA’s instructional letter in July 2021, the taxpayer instantly contacted her financial institution to grasp what had occurred. A special monetary adviser defined that the unique adviser (now not employed on the financial institution) who instructed the taxpayer to contribute to the TFSA made a mistake in calculating her contribution room. The adviser had included three years (2009-2011) when the taxpayer was not a resident of Canada, and thus had no TFSA contribution room ($15,000) for these years. Upon studying this, the taxpayer instantly withdrew her overcontribution.

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For those who by chance overcontribute to your TFSA past your most, you may get hit with an overcontribution penalty tax equal to 1 per cent per thirty days for every month you’re over the restrict. You possibly can 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 “immediately.”

If the CRA refuses to cancel the tax, you possibly can take the matter to federal court docket, the place a choose will decide whether or not the CRA’s determination to not waive the tax was affordable.

On July 20, 2021, the taxpayer was assessed the dreaded overcontribution penalty tax within the quantity of $1,800, together with a penalty of $90 and arrears of curiosity of $5.18. She utilized to the CRA for aid from the tax, penalty and curiosity, however her request was denied. She then requested an unbiased, second assessment of that call, however aid was once more denied, so she appealed to Federal Courtroom.

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The taxpayer defined her circumstances as a single lady “residing on a small pension … (who lives) far under the poverty line.” The overcontribution tax, penalty and curiosity totalled almost $1,900, which was almost 20 per cent of the taxpayer’s complete 2020 earnings. “This quantity is a hardship for me making an attempt to outlive on roughly $10,000 a yr,” she stated.

The CRA’s foundation for refusing the taxpayer’s aid request was twofold. First, she didn’t take away the surplus TFSA contribution “inside an inexpensive timeframe.” And, second, counting on the recommendation her monetary adviser was not, within the CRA’s view, a “affordable error,” however fairly “a matter between you and your financial institution.”

The choose disagreed on each accounts. The taxpayer didn’t withdraw the TFSA overcontribution immediately as a result of she didn’t obtain the CRA’s instructional letter as she was unable to return to Canada because of the pandemic. If it weren’t for the pandemic, she would have been at residence and would have obtained the letter when it arrived. As well as, she did instantly withdraw the overcontribution as quickly as she discovered about it.

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As for counting on the recommendation of her financial institution, the choose famous the CRA failed to supply any evaluation of why, in these circumstances, the taxpayer, counting on the faulty recommendation of her monetary adviser, had not made an inexpensive error. In a 2020 case involving a non-resident taxpayer who had overcontributed to her TFSA on the faulty recommendation of her financial institution, the choose ordered the matter returned again to the CRA for reconsideration.

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Within the present case, the choose allowed the taxpayer’s software, setting the CRA’s determination apart, and ordered an unbiased assessment to be performed “anew” by a unique CRA officer.

The choose acknowledged it’s doable that “the results of the brand new assessment would be the similar,” however in that case the taxpayer may then “search redress for her losses from (her financial institution).” In spite of everything, “it’s fairly incomprehensible how anybody may advise a consumer whose earnings is so low that no earnings tax is payable to spend money on a TFSA. It’s pointless, as a TFSA is a mechanism to shelter earnings from tax.”

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

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