Careful moving your TFSA or the CRA might take an interest

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I acquired my 2023 Discover of Evaluation this week and it contained the complete particulars of my tax evaluation, an evidence of modifications and different vital data, together with a one-page detailed registered retirement financial savings plan (RRSP) deduction restrict and out there contribution room assertion. What it didn’t include, nevertheless, was an identical assertion about my out there tax-free savings account (TFSA) contribution room.

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For this, it’s worthwhile to log on to the Canada Revenue Agency’s portal, My Account or telephone the tax data telephone service (TIPS) at 1-800-267-6999. Assuming you’ve got the persistence to carry (wait instances this week had been 1.5 to 2 hours), you possibly can ask an agent for a TFSA Room Assertion and a TFSA Transaction Abstract, which present the data the CRA has acquired out of your TFSA issuers about your contributions and withdrawals.

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Every year, all TFSA issuers are required to electronically submit a TFSA document to the CRA for every particular person who has a TFSA. Issuers should submit this data by the final day of February of the next yr, and report all TFSA transactions you made on or earlier than Dec. 31 of the prior yr.

It’s vital, nevertheless, to check the TFSA transaction data the CRA has with your personal information to make sure the data they’ve is appropriate and updated. It’s doable that while you look on-line, particularly within the first few months of the yr, the CRA could not but have acquired and processed the earlier yr’s transactions, that means they’re not but mirrored within the TFSA quantities proven on-line. This might result in an overcontribution.

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The penalty for overcontributing is the same as one per cent monthly for every month you’re over your restrict. When you get assessed a TFSA penalty tax, you possibly can request the CRA to waive or cancel it, which the company has the ability to do if it may be established the tax arose “as a consequence of an affordable error,” and the overcontribution is withdrawn from the TFSA “directly.”

If the CRA refuses to cancel the tax, you possibly can take the matter to Federal Courtroom, the place a choose will decide whether or not the CRA’s choice to not waive the tax was “affordable.”

The latest choice involving a TFSA overcontribution, determined in April 2024, involved a taxpayer who went about transferring his TFSA from one monetary establishment to a different within the fallacious approach.

The taxpayer had at the least two TFSA accounts. Firstly of 2020, his unused TFSA room was $6,270. He contributed a complete of $46,000 in 2020, and so he exceeded his restrict by $39,730 and was consequently assessed a penalty tax.

The supply of his overcontributions may very well be traced again to the taxpayer’s actions in early 2020. On Feb. 4, 2020, he withdrew $20,000 from his Fédération des caisses Desjardins du Québec TFSA account, and deposited it the subsequent day into his Nationwide Financial institution TFSA account.

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He did the identical factor once more the next month, when on March 9, 2020, he withdrew one other $20,000 from his Desjardins TFSA account, solely to deposit it the subsequent day into his Nationwide Financial institution of Canada TFSA. He had additionally deposited one other $6,000 into his TFSA account in early 2020, so his whole 2020 TFSA contributions had been $46,000, however he solely had $6,270 in unused room.

In July 2021, the taxpayer acquired a discover from the CRA advising him that he had exceeded his TFSA contribution restrict in 2020, and telling him he needed to pay $2,166 in penalty tax on his extra contributions for 2020.

In October 2021, the taxpayer despatched a letter to the CRA requesting that it cancel the tax on his extra TFSA contributions. In March 2022, the CRA wrote to him denying his request, saying it might solely accomplish that if the contributions had been made on account of a “affordable error,” and the person instantly took steps to withdraw them from the TFSA, which was not the case right here.

Following this refusal, the taxpayer filed a second software in April 2022 for the cancellation of the tax. In June 2022, the CRA once more denied his request “as a result of the transfers of funds made in 2020 from one TFSA account to a different TFSA account weren’t ‘direct transfers’ for the reason that transfers weren’t made by the monetary establishment.” The end result was that these transfers had been thought-about to be common contributions, placing the taxpayer in an overcontribution state of affairs.

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The taxpayer appealed this choice to the Federal Courtroom. He argued that “he (had) acted in good religion in transferring funds from one TFSA account to a different.” However the CRA maintained that the taxpayer’s error on this case was not a “affordable error” as a result of he admitted he had not made his transfers within the method prescribed by the CRA (by asking his monetary establishment to take action immediately) since he was unaware of the duty to take action. Within the CRA’s view, its train of discretion to waive the penalty tax wouldn’t be applicable within the circumstances.

The choose reviewed the arguments after which cited numerous prior instances coping with related situations by which it was held that it was as much as the taxpayer to grasp the TFSA guidelines, together with find out how to property switch funds “immediately” from one TFSA to a different.

It may well’t merely be carried out through a withdrawal and subsequent deposit, however have to be carried out immediately by the monetary establishment. In most of these instances, the courts have constantly held that the CRA’s refusal to deal with such errors as “affordable errors” (which might enable the CRA to waive the tax), was, itself, affordable.

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The choose in the end expressed sympathy for the taxpayer, however stated he was “sure by the jurisprudence and rules recognized by my colleagues. My position is to not rule on the deserves, however to evaluate whether or not the (CRA’s) choice is cheap, figuring out whether or not it’s intelligible, clear and justified.” The choose concluded that it was, and dismissed the taxpayer’s case.

Whereas the CRA sought prices, the choose refused to award the company something owing to the unlucky circumstances of the case.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Non-public Wealth in Toronto. Jamie.Golombek@cibc.com.

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