Tax Free Savings Accounts (“TFSA”) have been available to Canadian resident taxpayers since 2009. Each year taxpayers can contribute an additional amount to their TFSA. As the name suggests, the income/capital gains earned in the account are tax-free. But what happens is you contribute more than you are allowed to?
TFSA Over-Contribution Penalty
For taxpayers who mistakenly over-contribute to their TFSA, a penalty will apply. The penalty is 1% of the over-contribution for each month the over-contribution remains in the account.
Taxpayers rarely know that they are over-contributed, and the CRA typically does not know as well. If the CRA determines a taxpayer is over-contributed, it can be years after the initial over-contribution started. So, most TFSA penalty’s for being over-contributed are high because they are issued years after the problem started.
TFSA Over-Contribution – What if I Notice Before CRA?
If a taxpayer notices that they are over-contributed, they usually remove the excess to the extent possible. They are also supposed to complete a specific type of tax return known as an RC243 which calculates the penalty for the over-contribution.
If a taxpayer notices after a number of years, they may be eligible to file this return through the voluntary disclosure program to minimize any late filing penalties, and to get a break on the interest.
TFSA Over-Contribution – What if I Cannot Remove the Excess?
TFSAs are usually invested in a variety of investment vehicles. Most people choose to invest in stocks, bonds, GICS, or regular interest earning accounts. However, what happens if you’ve over-contributed, and the stock you invested in has dropped significantly? What if you cannot remove the over-contribution because there isn’t enough money in the TFSA to do so?
This is a very difficult situation that taxpayers may find themselves in. If you cannot remove the excess, technically the CRA can charge you a penalty every month until the annual contribution room exceeds the amount of your over-contribution.
If this has happened to you, you should seek a consultation with a lawyer immediately. You do have options and the ability to stop the penalty. We have assisted many taxpayers with this issue and we have been successful in the past bringing the over-contribution amount down to $0.
TFSA Over-Contribution – Can I Get Out of the Penalty?
Thankfully, the answer to this question is yes. The CRA has a specific relief program that reviews TFSA over-contribution issues, and decides whether the penalty should be removed.
The relief request must explain why the over-contribution was the result of a reasonable error, and it should also explain how you withdrew the excess as quickly as possible.
If your first relief application is rejected, you may file a second level review. If that is rejected your only option is to bring a judicial review application. This will ask a Judge to review the previous decisions to determine if they were reasonable. Taxpayers should understand a Judge is not reviewing for the right decision, but only if the CRAs decision was reasonable.
That is why it is important to consult a lawyer before filing the first request. You only have two chances before a complex court proceeding, so you should make sure you have the best chance by working with a lawyer.
TFSA Over-Contribution – What if I Disagree with the Penalty?
If the CRA has issued assessments for over-contributions, but you do not believe they are correct, you do have the ability to file a notice of objection arguing the assessments are wrong.
Conclusion
If you are over-contributed to your TFSA, or you think you might be, contact us here. SpenceDrake Tax Law will assist with reviewing all of the records, and we will prepare and file a TFSA taxpayer relief request for the best chance of obtaining relief from harsh penalties.
SpenceDrake Tax Law
Disclaimer
Each article/blog post is only meant to provide general information. It is posted on a specific date. Laws and rules change. Please know that it may be out of date. It is not meant to provide legal advice, and it does not provide legal advice. It cannot be relied on. Every tax situation is unique, and that may mean situations differ from this article/blog. If you have legal questions, please consult a lawyer.