On Jan. 1, the TFSA contribution limit finally increased by $500 to reach $6,500, marking the first time since 2019 that the limit has been increased. For clients who have never contributed to a TFSA before, the new cumulative TFSA limit is now $88,000. But to get access to that total limit, the client must have been a resident of Canada and at least 18 years of age since 2009.
A tax case decided in December 2022 demonstrates what can go wrong if someone makes overcontributions. The case is of particular interest to financial advisors, because the judge had some harsh words for the advisor, suggesting that the client should never have invested in a TFSA in the first place!
The taxpayer’s troubles began in December 2019 when she had a guaranteed investment certificate (GIC) coming due. A financial advisor at her bank advised her to use the proceeds to purchase another GIC and deposit it into a TFSA. She followed that advice and contributed $63,500 to a TFSA, putting in a further $6,000 in January 2020, when the new 2020 contribution room became available. She said this represented her total savings at the bank.
On Jan. 31, 2020, the taxpayer flew to the Dominican Republic expecting to be there for three months; however, the global pandemic changed her plans, and flights between the Dominican Republic and Canada were suspended. The taxpayer was unable to return to Canada until June 25, 2021, where she had to quarantine for 14 days before returning to her Prince Edward Island home.
While she was away, she asked a friend to manage her mail by having the friend take pictures of the envelopes, which were then sent to her so she could ask that envelopes unknown to her be opened.
The Canada Revenue Agency (CRA) sent the taxpayer an “educational letter” dated June 4, 2020, which informed her that she had overcontributed to her TFSA by $15,000, and told her that she needed to “withdraw the excess amount right away.”
Unfortunately, the taxpayer’s friend failed to send her a picture of the envelope containing the letter from the CRA, so the taxpayer was unaware of it (and the fact that she had overcontributed to her TFSA) until she returned to P.E.I.
When she opened the CRA educational letter in July 2021, the taxpayer immediately contacted her bank to understand what had occurred. A different financial advisor explained that the original advisor (no longer employed at the bank) who told the taxpayer to contribute to the TFSA made a mistake in calculating her TFSA contribution room, as the advisor included three years (2009–2011) when the taxpayer was not a resident of Canada, and thus had no TFSA contribution room ($15,000) for those three years. Upon learning this, the taxpayer immediately withdrew her overcontribution.
On July 20, 2021, the taxpayer was assessed an overcontribution penalty tax in the amount of $1,800, along with a penalty of $90 and arrears interest of $5.18. She applied to the CRA for relief from the tax, penalty and interest, but her request was denied. She then requested a second independent review of that decision, but relief was again denied, so she appealed to Federal Court.
The taxpayer explained her circumstances as a single woman “living on a small pension … [who lives] far below the poverty line.” The overcontribution tax, penalty and interest totalled nearly $1,900, which was nearly 20% of the taxpayer’s entire 2020 income. She stated, “This amount is a hardship for me trying to survive on approximately $10,000 a year.”
The CRA’s basis for refusing the taxpayer’s relief request was twofold. First, she didn’t remove the excess TFSA contribution “within a reasonable time frame.” Second, relying on her financial advisor’s advice was not, in the CRA’s view, a “reasonable error” but rather “a matter between you and your bank.”
The judge disagreed on both accounts. The taxpayer didn’t withdraw the TFSA overcontribution right away because she didn’t receive the CRA’s educational letter, as she was unable to return to Canada due to the pandemic. If it wasn’t for the pandemic, she would have been at home and received the letter when it arrived. In addition, she immediately withdrew the overcontribution as soon as she learned about it.
As for relying on the advice of her bank, the judge noted that the CRA failed to provide any analysis of why, in these circumstances, the taxpayer, who was relying on the erroneous advice of her financial advisor, had not made a reasonable error. The judge allowed the taxpayer’s application, setting aside the decision of the CRA, and ordered an independent review to be conducted “anew” by a different CRA officer.
While the judge acknowledged the possibility that “the result of the new review will be the same,” if that’s the case, the taxpayer could then “seek redress for her losses from [her bank].” After all, “it is quite incomprehensible how anyone could advise a client whose income is so low that no income tax is payable to invest in a TFSA. It is unnecessary, as a TFSA is a mechanism to shelter income from tax.”
Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the Managing Director, Tax & Estate Planning with CIBC Private Wealth in Toronto.