tax penalty / Erhui1979

Education is essential in keeping innocent clients from getting caught in the Canada Revenue Agency’s TFSA-abuse dragnet.

Over the past few years, a series of warnings and intensive audit campaigns suggest Canadian authorities have made misuse of TFSAs an enforcement priority, said David Rotfleisch, founding partner and tax lawyer with Rotfleisch & Samulovitch Professional Corp. in Toronto.

While most of the heat is on taxpayers who run businesses or actively trade through their TFSAs, the CRA has also imposed penalties on overcontributions — 1% of the excess amount per month — made by accountholders.

“TFSA abuse is on the CRA’s radar, so if you’re offside of the rules, you’re definitely going to get a knock on the door,” Rotfleisch said. “If it’s a genuine mistake, the CRA may be a little more forgiving; but if it’s deliberate, they are coming down fairly hard on it. The bottom line is that you have to be cognizant of the rules and in compliance.”

That’s where financial advisors have a role to play, said Wilmot George, vice-president of tax, retirement and estate planning with CI Investments Inc. Although TFSAs have been around since 2009, the popular investment vehicles are youngsters in the grand scheme of financial products, he said.

“The vast majority of excess contributions are made inadvertently,” George said. “Canadians are still learning the rules, and the first role for advisors is to be present for their clients and to deliver education.”

Mistakes are easily made, George added. Some of the more common pitfalls involve accountholders with more than one TFSA who unwittingly draw down their contribution limit by withdrawing from one account before adding to another rather than transferring directly between them.

Other common mistakes involve accountholders who make contributions after moving abroad. Canadians who reside out of the country can open new TFSAs and maintain existing ones, but they cannot make contributions while not resident.

In addition, the TFSA rules do not allow for wiggle room regarding the annual contribution limit — unlike RRSPs, for which penalties only begin accumulating after a contribution exceeds the allowable amount by $2,000.

Meanwhile, several recent court rulings suggest the CRA may not be as merciful as accountholders would hope. Taxpayers may apply for penalties to be waived when the excess contribution was made as a result of a “reasonable error” and immediately removed.

But there are no guarantees that a CRA decision-maker will exercise that discretion. Following a refusal, the next step is judicial review, but judges can step in only if the denial was unreasonable.

Earlier this year, in Rempel v. Canada (Attorney General), Justice Glennys McVeigh dismissed the case of a man in British Columbia who was penalized $1,165 for overcontributions, despite expressing sympathy for his plight and writing that the CRA’s ruling “might not be what I would have decided.”

The man missed an email warning that he had exceeded his limit for 2017 and 2018 before eventually withdrawing the excess amount when he received a notice mailed to his home address. However, his plea for a penalty waiver fell on deaf ears at the CRA, and Justice McVeigh found she could not help him with what she considered a “genuine mistake.”

“While unfortunate for Mr. Rempel, his mistake, both in over-contributing to his TFSA and then in not monitoring his communications, should not be transferred to the CRA,” Justice McVeigh wrote.

In another case — Sangha v. Canada (Attorney General) — a taxpayer whose ill health was compounded by a TFSA dispute persuaded the court that the CRA’s decision to turn down his request for a penalty waiver was unreasonable because it lacked “analysis and justification.”

However, the man’s prize for victory was a fresh hearing before a different CRA official, who could issue another, more reasonable refusal.

“It shocks the conscience to see the CRA attacking innocent people for innocent mistakes,” said Jamie Golombek, managing director of tax and estate planning with CIBC Private Wealth Management. “The amount of tax-free returns in many of these cases is basically zero anyway because interest rates are so low.”

In an email to Investment Executive, the CRA stated the agency takes an “education-first approach” to TFSA issues “by providing information on and a dedicated TFSA section on My Account for Individuals.” The email also noted that the CRA sends letters to individuals who exceed their TFSA contribution room to inform the accountholder “of the requirement to withdraw the excess amount immediately.”

Golombek remains hopeful that legislators in Ottawa will latch onto the Conservative Party of Canada’s election promise of greater leniency for first-time tax errors, despite that party’s loss to the Liberals.

In the meantime, you can save your clients a lot of hassle and expense by ensuring they get their TFSA contributions right the first time.

“We should be bringing up the TFSA in every single annual review,” Golombek said. “Part of the problem is that when a client opens another account with a different branch, and they don’t want to say. But if you can become their trusted advisor, and make sure you’re handling all of their TFSAs, it’s easier to keep a running tally of the contributions and withdrawals.”