When you meet with a client to discuss their annual TFSA contribution, an obvious opportunity arises to ask them whether they are fully caught up on prior years’ contributions. Because unused room automatically carries forward from one calendar year to the next, an individual’s limit for 2023 could be as high as $88,000 if they’ve never made a TFSA contribution before and they were a resident of Canada since 2009.
One of the easiest ways clients can verify their available TFSA contribution limit and avoid an overcontribution penalty is to double check their limit online. This can easily be done by logging on to the Canada Revenue Agency’s online portal for individuals called My Account.
When going online, however, you should warn your clients that the TFSA contribution and withdrawal information they see posted is not updated in real time and may be out of date. They should be sure to check the “as of” date posted online along with their TFSA room.
The other thing to be aware of is that in some cases, the number shown on the screen may be in brackets, meaning they have a “negative contribution limit,” which can happen if they’ve overcontributed in a prior calendar year.
A recent case decided in June 2023 involved a taxpayer who claimed to be confused by this bracketed amount, ran afoul of his TFSA limit, and went to court trying to get a judge to order the CRA to reconsider his case.
The taxpayer began contributing to his TFSA in 2014. In 2015 he overcontributed and, as a result, in May 2016 the CRA sent him an “education letter” notifying him of his overcontribution and telling him that he was required to withdraw the excess contribution “immediately” to avoid the penalty tax.
Fast forward to 2021 when the taxpayer once again overcontributed to his TFSA. In July 2022, the CRA notified him of his overcontribution by way of a notice of assessment, charging him with an overcontribution tax of $2,571 plus a penalty of $128.53, along with arrears interest.
The taxpayer subsequently requested to have the tax and penalties cancelled. The taxpayer explained that he had consulted his profile on the CRA’s website, which identified his TFSA contribution room as “($18,459.99).” The taxpayer explained that he interpreted this information as meaning that he had $18,459.99 in available TFSA contribution room, “not realizing that the brackets around that figure indicated that he actually had a negative contribution limit, as a result of previous overcontribution.” He told the CRA agent that he was taking steps to remove the excess amount.
In August 2022, the CRA denied his first request to cancel the tax, explaining that his circumstances “did not constitute a reasonable error.” The CRA explained that the taxpayer had already received an education letter back in 2016 due to a previous TFSA overcontribution and that it was the taxpayer’s responsibility to withdraw any excess contributions and “to keep and review accurate records to ensure” he remains within his TFSA contribution room.
The following month, the taxpayer requested a second independent review by a different CRA officer. In his letter to the CRA, he explained that he shouldn’t be blamed for his overcontribution as he “was not aware that a contribution limit displayed in brackets signifies a negative amount (i.e., an excess) and that, upon learning of his overcontribution, he promptly removed the excess amount from his TFSA account.”
The CRA again denied the taxpayer’s request, which is why the taxpayer took the matter to Federal Court asking the judge the determine whether the CRA officer’s refusal to exercise their discretion and cancel the overcontribution tax was “reasonable.”
The judge had no doubt that the taxpayer was acting honestly and his overcontribution was based on a “genuine misunderstanding” as to how much TFSA contribution room he had. But, ultimately, a taxpayer’s contribution room, and whether or not they are in an overcontribution position, is a function of contributions and withdrawals made by that taxpayer. It’s not dependent on whether a taxpayer understands the information on a website.
Since the taxpayer’s contribution information is “within the knowledge, or the means of knowledge, of the taxpayer,” the judge concluded that the CRA’s reasoning in denying the taxpayer’s request for relief was “intelligible” and reasonable, and dismissed the taxpayer’s application for judicial review.
Helping your clients keep on top of their TFSA contribution room could help them avoid a costly overcontribution error.
Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the Managing Director, Tax & Estate Planning with CIBC Private Wealth in Toronto.