Thursday, May 18, 2023
HomePersonal FinanceLarge TFSA overcontribution lands taxpayer in hassle with the CRA

Large TFSA overcontribution lands taxpayer in hassle with the CRA

Jamie Golombek: Taxpayer overcontributed $639,308, then refused to withdraw extra contributions as a result of his investments had been down

Article content material

Juliet as soon as stated, “A rose by every other identify would scent as candy.” However would the tax-free financial savings account (TFSA) be as in style as it’s with out its “tax-free” descriptor?

Commercial 2

Article content material

In all probability not, in response to a brand new paper, “Tax-Free”: The Impact of a Heuristic Cue on the Alternative Between a TFSA and an RRSP, printed earlier this month within the Canadian Tax Journal. The authors investigated whether or not a heuristic cue, particularly, the time period “tax-free” causes particular person buyers to desire contributing to a TFSA, slightly than to a registered retirement financial savings plan (RRSP). They performed three experiments to check this proposition, and concluded that people have a transparent desire for a tax-sheltered financial savings plan with tax-free in its identify, no matter whether or not a TFSA is, certainly, the higher retirement financial savings automobile for them.

Article content material

As I’ve usually mentioned on this column, the selection of whether or not to contribute to a TFSA or RRSP (assuming you don’t have ample funds to do each) will typically come right down to your tax price at present versus your anticipated tax price upon retirement (or withdrawal.)

Commercial 3

Article content material

The tax price for a lot of Canadians upon retirement shall be decrease than it was after they had been working, suggesting that the financial savings plan of selection for many needs to be the RRSP, which supplies a tax deduction at present at a excessive(er) price, and an revenue inclusion upon withdrawal at a low(er) price.

However for lower-income Canadians, it’s probably higher to pay some tax at present at a low price on their revenue, after which save these after-tax funds in a TFSA, the place they’ll develop tax free and be taken out at any time, tax free, when one’s tax price could also be greater.

The authors of the paper stated the TFSA has prior to now decade change into extra in style than the RRSP, with whole annual TFSA contributions surpassing whole annual RRSP contributions every year since 2013. However the recognition of the TFSA has additionally led to some taxpayers getting penalized by the Canada Income Company (CRA) for overcontributing.

Article content material

Commercial 4

Article content material

Take the latest case involving a taxpayer who in 2020 considerably overcontributed to his TFSA to the tune of $639,308 by drawing on his line of credit score and investing the borrowed funds into shares inside his TFSA.

Below the Revenue Tax Act, there’s a penalty of 1 per cent monthly for every month there’s a TFSA overcontribution. Accordingly, the taxpayer in July 2021 was reassessed and charged an overcontribution tax of $6,393.08, which is one per cent of the overcontributed quantity, presumably relating to at least one month (December 2020) of overcontribution tax. He was additionally charged penalties and curiosity.

The CRA has discretion to grant relief on TFSA overcontribution penalties.
The CRA has discretion to grant aid on TFSA overcontribution penalties. Picture by Chris Roussakis/QMI Company

The act, nonetheless, permits the CRA discretion to grant aid, and states that the company might waive or cancel the penalty tax if the surplus arose by “cheap error,” and is corrected by the person “directly.”

Commercial 5

Article content material

Shortly after receiving his reassessment, the taxpayer contacted the CRA and defined it was his first time utilizing a TFSA and that he “was unaware of the way it labored.” He additional blamed his monetary establishment, which “didn’t inform him of the relevant guidelines.” When advised by a CRA agent to instantly withdraw all the surplus contributions from his TFSA, the taxpayer responded that his investments had been down 35 per cent and that he would withdraw the cash “as quickly because the market improved.”

The next month, he adopted up with a letter formally requesting the penalty tax be cancelled. In describing his “tough monetary state of affairs,” he famous he was making an attempt to offer for his household and pay his mortgage all whereas being on incapacity as a consequence of a office accident. By this level, his investments had been down by “about 50 per cent.”

Commercial 6

Article content material

He adopted up with a second letter in October 2021 and stated his portfolio was “now down about 45 per cent and that he’s not able” to withdraw the overcontributions, however promised to take action “as quickly as issues get higher together with his investments.”

At this level, the CRA wrote to the taxpayer and stated it had reviewed his state of affairs and observed the removing of all extra TFSA contributions didn’t happen, so it refused to cancel the overcontribution tax.

The taxpayer requested a second-level evaluation, which was additionally denied. The taxpayer then took the matter to Federal Court docket, the place the choose’s position is to find out whether or not the CRA officer’s refusal to train their discretion to disclaim the taxpayer aid was “cheap.”

Commercial 7

Article content material

As in prior circumstances, an inexpensive resolution is one that’s “based mostly on an internally coherent and rational chain of study and that’s justified in relation to the info and regulation that constrain the choice maker.” Usually, a CRA resolution isn’t put aside until it incorporates “sufficiently critical shortcomings … such that it can’t be stated to exhibit the requisite diploma of justification, intelligibility and transparency.”

Upon reviewing the info of the case, the choose discovered it “questionable” whether or not the taxpayer’s vital overcontribution was the results of an inexpensive error because the taxpayer made no enquiries as to how TFSAs labored earlier than making a really vital overcontribution. The choose additionally stated that even when it was an inexpensive error, the taxpayer selected to not withdraw his overcontribution when he was first notified of it by the CRA, thus failing to fulfill the requirement to take action “directly.”

Commercial 8

Article content material

The choose cited a previous case that famous “the CRA isn’t answerable for the character of the investments made by (a taxpayer) in his TFSA. He alone bears that danger. (The taxpayer) has determined to keep away from financial loss in his TFSA however in doing so can not then search discretionary aid from the tax imposed on his extra quantity.”

Consequently, the choose concluded the CRA’s resolution to disclaim aid was cheap, as was its rationalization and justification for doing so. The choose noticed no purpose to intervene.

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


For those who appreciated this story, join extra within the FP Investor publication.



Postmedia is dedicated to sustaining a full of life however civil discussion board for dialogue and encourage all readers to share their views on our articles. Feedback might take as much as an hour for moderation earlier than showing on the positioning. We ask you to maintain your feedback related and respectful. We now have enabled electronic mail notifications—you’ll now obtain an electronic mail for those who obtain a reply to your remark, there may be an replace to a remark thread you observe or if a consumer you observe feedback. Go to our Group Tips for extra data and particulars on how you can regulate your electronic mail settings.

Be a part of the Dialog



Please enter your comment!
Please enter your name here

Most Popular

Recent Comments