Taxpayer will get burned after blindly counting on CRA’s web site information

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The Canada Income Company issued a cautionary press launch earlier this 12 months concerning the significance of sticking inside your tax-free financial savings account contribution restrict. Titled Watch your restrict – keep inside it!, the CRA reminded Canadians that it’s doable to overcontribute to a TFSA in various methods.

One instance of an inadvertent overcontribution, cited by the CRA, can happen in case your TFSA is ready up for pre-authorized contributions and also you make further contributions with out verifying the quantity of room you will have out there. One other is you probably have a number of TFSAs with completely different monetary establishments and also you’re not fastidiously monitoring all of the contributions you’re making.

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However a 3rd path to a possible TFSA overcontribution is when you misinterpret or misread your TFSA restrict as proven on the CRA’s My Account self-service portal. That’s precisely what occurred in a current case. However first, let’s recap TFSA contribution fundamentals and the results of a non-deliberate overcontribution.

Your TFSA restrict is cumulative and begins whenever you’re 18 years previous, assuming you have been a resident of Canada in that 12 months. Your TFSA contribution room is made up of three issues: the annual TFSA greenback restrict, plus any unused contribution room from earlier years, plus any withdrawals you made throughout earlier years (excluding direct transfers to a different TFSA).

The annual TFSA greenback restrict for 2024 is $7,000, and your cumulative restrict might be as excessive as $95,000 in 2024, assuming you have been not less than 18 years previous and a resident of Canada repeatedly since 2009, and have by no means contributed.

Should you by chance overcontribute, the CRA fees a penalty tax of 1 per cent for each month that any extra contributions keep in your account. Withdrawing them as quickly as doable will assist cut back the penalty tax.

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The CRA does, nevertheless, have the facility to waive or cancel all or a part of the penalty tax if it determines it’s acceptable to take action after reviewing all components. To think about your request, it is advisable write to the CRA and clarify why the overcontribution arose and why it will be truthful to cancel or waive all or a part of the tax. Ought to the CRA refuse to take action, you will have the appropriate to a second evaluation. Ought to that even be unsuccessful, you may search a judicial evaluation in Federal Courtroom, the place the decide will decide whether or not the CRA officer’s determination was affordable.

The troubles for the taxpayer on this current case started in early 2020. His 2020 TFSA contribution restrict as of Jan. 1, 2020, was $6,337, however he contributed $12,563 for the 2020 tax 12 months. The CRA decided that his extra TFSA contribution for 2020 was $6,226, and despatched him an “educational letter” in July 2021 with a warning that “in the future, if you continue to contribute more than your contribution room allows, the CRA may impose a tax of one per cent on you for each month that the overcontributed amount remains in your TFSA.” No fee was ever made in respect of this overcontribution penalty.

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The taxpayer’s woes continued into 2021 when his contribution restrict was unfavourable (minus $226), however he nonetheless proceeded to make a TFSA contribution of $12,153, representing a complete overcontributed quantity of $12,379 for every month of 2021. In July 2022, the CRA decided his overcontribution tax to be $123.79 for every month, for a complete of $1,485. Add in arrears curiosity and the whole penalty tax was $1,566.

The taxpayer wrote to the CRA asking that this quantity be cancelled, saying he was “misled” by the data on the CRA My Account portal, which indicated “very different” TFSA contribution limits. He pointed to copies of CRA paperwork, presumably My Account screenshots, exhibiting he had TFSA room of $12,335 for 2020 as of Jan. 9, 2020, and TFSA room of $12,237 for 2021 as of Jan. 12, 2021.

“I have always consulted My Account before contributing to my TFSA and contributed according to the amounts displayed,” the taxpayer stated. “If the contents of My Account are useless, at least have the decency to notify me.”

The CRA denied the taxpayer’s first request to cancel the overcontribution tax, explaining that the data posted in My Account solely contains transactions reported to the CRA by monetary establishments as much as a sure time limit. Since establishments have till the top of February of the next 12 months to submit their report for the prior 12 months, the data accessed in January might solely be partial. A warning to this impact is displayed on the CRA’s web site, and it’s in the end as much as the taxpayer to maintain observe of their contributions and withdrawals.

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In late 2022, the taxpayer once more wrote to the CRA to say he didn’t settle for this primary determination and requested for a second-level evaluation. This was additionally denied, so the taxpayer went to the Federal Courtroom. In these kinds of instances, it’s as much as the particular person requesting the judicial evaluation to show the contested determination was not affordable. The traits of an affordable determination, based mostly on prior jurisprudence, are its justification, its transparency and its intelligibility.

Below the Revenue Tax Act, to ensure that the CRA to waive any TFSA overcontribution tax, two circumstances have to be met: it have to be proven that the taxpayer made an affordable error and that they took speedy steps to withdraw their extra contributions to their TFSA as quickly as doable.

The decide reviewed all of the info and concluded the CRA’s determination to not waive the overcontribution tax was affordable because it was as much as the taxpayer to know his personal TFSA restrict.

“In a self-assessment system … a taxpayer must inform themselves … to know the limits of their annual contributions,” the decide stated. “The My Account online (portal) contains a warning about receiving information from financial institutions. (It) cannot constitute a reasonable error to have ignored the warning and not to have compared the (incomplete) information online with one’s own information.”

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The decide concluded that the taxpayer couldn’t ignore the warning on the positioning and the 2020 academic letter from the CRA after which declare an affordable error in 2021 for subsequent overcontributions. Briefly, “Ignorance of the law cannot constitute a reasonable error.”

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

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