While the TFSA’s popularity continues to rise among Canadians, the Canada Revenue Agency (CRA) continues to crack down on overcontributions by assessing a penalty tax of 1% per month for each month an overcontribution remains in the plan.
Helping clients track their TFSA contribution room while at the same time reminding them of the proper way to transfer a TFSA from one financial institution to another will go a long way toward helping them minimize TFSA overcontributions, and the resultant headache sometimes involved in getting the matter satisfactorily resolved.
Take, for example, the most recent case, which involved a taxpayer who, in 2016, had a TFSA contribution limit of just over $10,000. On January 8, 2016, he contacted his financial institution by telephone to make a $10,000 TFSA contribution. Ten days later, he phoned back his financial institution to ask if the contribution he had made via telephone on January 8th had been processed. Unfortunately, the clerk on the phone failed to see that a colleague had already processed his January 8th TFSA contribution and proceeded to redo the contribution, resulting in an overcontribution of $10,000.
Things got worse. In June 2016, the taxpayer contacted his financial institution about rumours he had read in the news concerning the institution’s demise. The taxpayer was then advised to split his deposits between two separate entities owned by the financial institution to have the benefit of Canada Deposit Insurance Corporation protection. The taxpayer followed this advice and gave directions over the phone to split his accounts. Unfortunately, these directions were mistaken for an order to contribute a further $10,000 to a TFSA rather than transfer $10,000 from one TFSA to another. Thus, the taxpayer ended up with $30,000 of total TFSA contributions in 2016, rather than the $10,000 he intended to contribute.
The $20,000 of excess contributions went undiscovered until July 2017, when the taxpayer received an assessment from the CRA for $1,800 in penalty taxes. The taxpayer immediately withdrew $20,000 from his TFSA, depositing this amount back to his bank account and applied for relief from the CRA from the taxes and penalties caused by the over-contributions.
In September 2017, the CRA denied his request. He then requested a second review of this denial. In May 2018, the CRA once again declined the taxpayer’s request, as he was, apparently, in the words of the CRA, “a repeat over-contributor to his TFSA.”
The CRA based this on the fact that in 2014, the taxpayer, who had TFSA contribution room of $5,500, contributed that amount to a TFSA. In June 2016, he withdrew $5,500 from his TFSA and personally deposited that amount in another TFSA account with a different financial institution. Under the Tax Act, however, this is considered to be a withdrawal and contribution.
Back in 2015, the CRA assessed the 2014 transactions as two separate contributions, and applied penalty tax and interest totaling $440. The taxpayer objected to this assessment and, ultimately, in June 2016 the CRA waived the tax on the basis that the excess TFSA contribution occurred due to a transfer between financial institutions.
In refusing to grant relief for the 2016 overcontributions, the CRA stated that the taxpayer “continued to make excess contributions to (his) TFSA in 2016, after (he was) notified by the (CRA) about TFSA excess contributions made in 2014.” The CRA thus concluded that the taxpayer was a repeat over-contributor to his TFSA account, which he had been advised of, and that a “clerical error at his financial institution was not a reasonable error.”
The taxpayer felt that the 2016 assessment “was done in a mechanical way, with a purely robotic approach, and no qualitative factors or mitigating circumstances entered into making the decision.”
The judge, sympathizing with the taxpayer, ruled that his inadvertent TFSA overcontribution in 2014 was not connected to the question of whether relief should be granted regarding the 2016 TFSA overcontributions. In the judge’s view, “it was unreasonable for the (CRA) to consider the 2014 over-contributions and the notices received by the (taxpayer) in that regard when assessing whether relief should be granted in respect of the 2016 excess contributions.”
Calling the CRA’s characterization of the taxpayer as a repeat over-contributor “unjustified,” the judge concluded that the CRA’s decision was “unreasonable because it did not fully assess the extent to which the excess contributions resulted from the mistakes of persons other than the taxpayer.”
While the taxpayer had hoped the judge would simply cancel the $1,800 in penalty tax and interest, the judge could not do so. As the judge wrote, the court “does not have the jurisdiction to order the (CRA) to waive taxes, penalties, and arrears interest. The jurisdiction of the Court is limited to ordering the (CRA) to substantively reconsider (its) decisions.”
The judge therefore concluded that the CRA’s decision was “not reasonable” and should be returned to the CRA for reconsideration by a different officer.