For the second year in a row, the taxman will offer leniency to those Canadians who unwittingly have overcontributed to their tax-free savings accounts, waiving any taxes they might have incurred by doing so in 2010.

In a statement released in August, the federal government says that about 1.5% of the almost 6.7 million Canadians who hold a TFSA will be receiving a letter from the Canada Revenue Agency, asking for more information about their accounts. Canadians who may have overcontributed can request that the CRA review their file and, if applicable, waive any taxes on excess contributions.

“We will once again be as flexible as possible,” the statement says, “in cases where a genuine misunderstanding of the TFSA rules occurred.”

Last year, the government decided to waive taxes related to inadvertent TFSA overcontributions made in 2009. The move came after more than 70,000 Canadians received letters informing them they might have made excess contributions.

The TFSA, which was introduced in 2009, allows Canadians to contribute up to $5,000 a year to a tax-deferred savings account. Unused contribution room in one year is carried forward and added to contribution room in subsequent years. Any withdrawal from a TFSA is without tax consequences, and an amount equal to the withdrawal amount is added to the TFSA-holder’s contribution room for the following calendar year.

It is this last detail that trips up many TFSA-holders. A client who, for instance, contributes $5,000 to a TFSA in January, then withdraws $1,000 in June, then contributes $1,000 in September — all in the same calendar year — has overcontributed to that TFSA by $1,000. The CRA assesses a 1% tax per month on excess contribution amounts.

The announcement of the TFSA overcontribution tax relief offer for the 2010 filing year comes less than two weeks after the release of a report from the Office of the Taxpayers’ Ombudsman criticizing the CRA for not having done an adequate job of helping Canadians understand TFSAs.

According to ombudsman J. Paul Dubé’s report: “[The CRA] has the responsibility to anticipate, to some degree, the challenges that taxpayers could likely face when dealing with a new tax program. The CRA should have been more proactive in informing Canadians about the tax consequences of the TFSA.”

In response, the CRA says it will take steps to improve its communications to Canadians concerning the TFSA, including updating TFSA web pages, issuing tax tips, reaching out through the media and introducing webinars for financial services institutions about TFSAs.

Financial services organizations say they welcome the CRA’s renewed commitment to TFSA education and are eager to work with the CRA on co-ordinated initiatives. However, many financial services industry officials believe, the process of familiarizing Canadians with the rules of the TFSA will take time.

“The TFSA is a major new program,” says Barbara Amsden, director of strategy and research with the Investment Industry Association of Canada. “People have had 50 years to get used to RRSPs; we can’t expect them to understand everything about TFSAs from Day 1.”

Individual financial services firms are also boosting their own TFSA marketing and education programs because TFSAs are increasing in popularity with Canadians, despite the fact some confusion still exists regarding how they work. Royal Bank of Canada, for example, has continued to expand its online advice and information sites specifically related to the TFSA, and has started to combine its RRSP marketing with that for the TFSA.

“Internally, we now refer to our RRSP campaign as the ‘winter investment season’,” says Lee Anne Davies, head of retirement strategies with RBC in Toronto, “because we want to focus on RRSPs and TFSAs together.” IE