Another reminder to help clients understand their TFSA room

The taxpayer’s 2020 TFSA contribution limit as of Jan. 1, 2020, was $6,337, but the taxpayer contributed $12,563 for the 2020 tax year. The CRA determined that his excess TFSA contribution for 2020 was therefore $6,226, and in July 2021 sent him an “educational letter” warning him that “in the future, if you continue to contribute more than your contribution room allows, the CRA may impose a tax of 1% on you for each month that the overcontributed amount remains in your TFSA.” No payment was ever made in respect of this overcontribution.

The taxpayer’s troubles continued into 2021, as his contribution limit was negative ($226), but he nonetheless proceeded to make a TFSA contribution that year of $12,153, representing a total overcontributed excess amount of $12,379 for each month of 2021.

In July 2022, the CRA therefore determined his overcontribution tax to be $123.79 ($12,379 × 1%) for each month, for a total of $1,485. When arrears interest was added, the total TFSA reassessment notice was for $1,566.

The taxpayer wrote to the CRA asking that this amount be cancelled, saying he was “misled” by the information on the CRA My Account portal, which indicated “very different” TFSA contribution limits. The taxpayer pointed to copies of CRA documents — presumably My Account screenshots — showing 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.

The taxpayer wrote, “I have always consulted My Account before contributing to my TFSA and contributed according to the amounts displayed.… 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 information posted in My Account, and supposedly relied upon by the taxpayer, includes only transactions reported to the CRA by financial institutions up to a certain point in time. Since institutions have until the end of February of the following year to submit their reports for the prior year, the information accessed in January may only be partial. A warning to this effect is displayed on the CRA website, and it’s ultimately up to the taxpayer to keep track of their contributions and withdrawals.

In late 2022, the taxpayer again wrote to the CRA saying he did not accept this first decision and asked for a second-level review. This was also denied.

So, the taxpayer went to Federal Court seeking a judicial review of the CRA officer’s decision not to waive the penalty tax. In these types of cases, it’s up to the person requesting the judicial review to prove that the contested decision was not reasonable. The characteristics of a reasonable decision, based on prior jurisprudence, are its justification, transparency and intelligibility.

Under the Income Tax Act, for the CRA to waive any TFSA overcontribution tax, two conditions must be met: it must be shown that the taxpayer made a reasonable error, and that the taxpayer took rapid steps to withdraw the excess contributions to the TFSA as soon as possible.

The judge reviewed all the facts and concluded that the CRA’s decision not to waive the overcontribution tax was reasonable since it was up to the taxpayer to know his own TFSA limit.

So, while we’re not ultimately responsible for our clients’ compliance with the tax act, we can be proactive in helping them track their TFSA room — provided they keep us informed of all their TFSA accounts, contributions and withdrawals.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the Managing Director, Tax & Estate Planning with CIBC Private Wealth in Toronto.