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The tax-free savings amount (TFSA) contribution limit on Jan. 1, 2023, will finally increase by $500 to reach $6,500, marking the first time since 2019 that this limit has been increased.
That’s because in 2015, the government announced the annual TFSA limit would be fixed at $5,000, indexed to inflation for each year after 2009, but rounded to the nearest $500. In other words, only once the cumulative indexed annual contribution limit exceeded $6,250 (which it did in 2022) was the limit bumped up by $500 to $6,500, from $6,000.
For someone who has never contributed to a TFSA, the new cumulative limit on Jan. 1, 2023, will be $88,000. But in order to get access to that total TFSA limit, an individual must have been a resident of Canada, and at least 18 years of age, since 2009. A tax case decided earlier this month demonstrates what can go wrong if you make a lump-sum TFSA catch-up contribution beyond what you are entitled to contribute.
The taxpayer’s troubles began in December 2019 when she had a guaranteed investment certificate (GIC) coming due. A financial adviser 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, but the global pandemic changed her plans and flights between the two countries were suspended. She was unable to return to Canada until June 25, 2021, where she had to quarantine for 14 days before returning to her home in Prince Edward Island.
While she was away, she asked a friend to take pictures of her mail, which were then sent to her home so she could ask that that those unknown to her be opened.
The Canada Revenue Agency sent the taxpayer an “educational letter” dated June 4, 2020, that informed her she had overcontributed to her TFSA by $15,000, and told her 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 CRA’s letter, so she was unaware of it (and the fact that she had overcontributed to her TFSA) until she returned to P.E.I.
After finally opening the CRA’s educational letter in July 2021, the taxpayer immediately contacted her bank to understand what had occurred. A different financial adviser explained that the original adviser (no longer employed at the bank) who told the taxpayer to contribute to the TFSA made a mistake in calculating her contribution room. The adviser had 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 years. Upon learning this, the taxpayer immediately withdrew her overcontribution.
If you accidentally overcontribute to your TFSA beyond your maximum, you can get hit with an overcontribution penalty tax equal to one per cent per month for each month you’re over the limit. You can ask the CRA to waive or cancel this penalty tax if it can be established that it arose “as a consequence of a reasonable error” and the overcontribution is withdrawn from the TFSA “without delay.”
If the CRA refuses to cancel the tax, you can take the matter to federal court, where a judge will determine whether the CRA’s decision not to waive the tax was reasonable.
On July 20, 2021, the taxpayer was assessed the dreaded overcontribution penalty tax in the amount of $1,800, along with a penalty of $90 and arrears of 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 an independent, second 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 per cent of the taxpayer’s entire 2020 income. “This amount is a hardship for me trying to survive on approximately $10,000 a year,” she said.
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.” And, second, relying on the advice her financial adviser 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 weren’t for the pandemic, she would have been at home and would have received the letter when it arrived. In addition, she did immediately withdraw the overcontribution as soon as she learned about it.
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As for relying on the advice of her bank, the judge noted the CRA failed to provide any analysis of why, in these circumstances, the taxpayer, relying on the erroneous advice of her financial adviser, had not made a reasonable error. In a 2020 case involving a non-resident taxpayer who had overcontributed to her TFSA on the erroneous advice of her bank, the judge ordered the matter returned back to the CRA for reconsideration.
In the current case, the judge allowed the taxpayer’s application, setting the CRA’s decision aside, and ordered an independent review to be conducted “anew” by a different CRA officer.
The judge acknowledged it’s possible that “the result of the new review will be the same,” but in that 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. Jamie.Golombek@cibc.com
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