Jamie Golombek: The CRA refused to grant the taxpayer aid on penalties, however a decide mentioned the taxman was within the improper
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The tax-free savings amount (TFSA) contribution restrict on Jan. 1, 2023, will lastly enhance by $500 to achieve $6,500, marking the primary time since 2019 that this restrict has been elevated.
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That’s as a result of in 2015, the federal government introduced the annual TFSA restrict could be mounted at $5,000, listed to inflation for every year after 2009, however rounded to the closest $500. In different phrases, solely as soon as the cumulative listed annual contribution restrict exceeded $6,250 (which it did in 2022) was the restrict bumped up by $500 to $6,500, from $6,000.
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For somebody who has by no means contributed to a TFSA, the brand new cumulative restrict on Jan. 1, 2023, might be $88,000. However with the intention to get entry to that complete TFSA restrict, a person will need to have been a resident of Canada, and at the least 18 years of age, since 2009. A tax case determined earlier this month demonstrates what can go improper in case you make a lump-sum TFSA catch-up contribution past what you might be entitled to contribute.
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The taxpayer’s troubles started in December 2019 when she had a assured funding certificates (GIC) coming due. A monetary adviser at her financial institution suggested her to make use of the proceeds to buy one other GIC and deposit it right into a TFSA. She adopted that recommendation and contributed $63,500 to a TFSA, placing in an additional $6,000 in January 2020, when the brand new 2020 contribution room grew to become obtainable. She mentioned this represented her complete financial savings on the financial institution.
On Jan. 31, 2020, the taxpayer flew to the Dominican Republic anticipating to be there for 3 months, however the world pandemic modified her plans and flights between the 2 international locations have been suspended. She was unable to return to Canada till June 25, 2021, the place she needed to quarantine for 14 days earlier than returning to her dwelling in Prince Edward Island.
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Whereas she was away, she requested a pal to take footage of her mail, which have been then despatched to her dwelling so she might ask that that these unknown to her be opened.
The Canada Revenue Agency despatched the taxpayer an “instructional letter” dated June 4, 2020, that knowledgeable her she had overcontributed to her TFSA by $15,000, and advised her she wanted to “withdraw the surplus quantity instantly.”
Sadly, the taxpayer’s pal did not ship her an image of the envelope containing the CRA’s letter, so she was unaware of it (and the truth that she had overcontributed to her TFSA) till she returned to P.E.I.
After lastly opening the CRA’s instructional letter in July 2021, the taxpayer instantly contacted her financial institution to know what had occurred. A special monetary adviser defined that the unique adviser (now not employed on the financial institution) who advised 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 these years. Upon studying this, the taxpayer instantly withdrew her overcontribution.
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For those who by chance overcontribute to your TFSA past your most, you may get hit with an overcontribution penalty tax equal to 1 per cent monthly for every month you’re over the restrict. You’ll be able to ask the CRA to waive or cancel this penalty tax if it may be established that it arose “as a consequence of an inexpensive error” and the overcontribution is withdrawn from the TFSA “at once.”
If the CRA refuses to cancel the tax, you may take the matter to federal courtroom, the place a decide will decide whether or not the CRA’s choice to not waive the tax was cheap.
On July 20, 2021, the taxpayer was assessed the dreaded overcontribution penalty tax within the quantity of $1,800, together with a penalty of $90 and arrears of curiosity of $5.18. She utilized to the CRA for aid from the tax, penalty and curiosity, however her request was denied. She then requested an impartial, second assessment of that call, however aid was once more denied, so she appealed to Federal Court docket.
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The taxpayer defined her circumstances as a single lady “residing on a small pension … (who lives) far beneath the poverty line.” The overcontribution tax, penalty and curiosity totalled almost $1,900, which was almost 20 per cent of the taxpayer’s total 2020 earnings. “This quantity is a hardship for me attempting to outlive on roughly $10,000 a 12 months,” she mentioned.
The CRA’s foundation for refusing the taxpayer’s aid request was twofold. First, she didn’t take away the surplus TFSA contribution “inside an inexpensive time-frame.” And, second, counting on the recommendation her monetary adviser was not, within the CRA’s view, a “cheap error,” however slightly “a matter between you and your financial institution.”
The decide disagreed on each accounts. The taxpayer didn’t withdraw the TFSA overcontribution instantly as a result of she didn’t obtain the CRA’s instructional letter as she was unable to return to Canada as a result of pandemic. If it weren’t for the pandemic, she would have been at dwelling and would have acquired the letter when it arrived. As well as, she did instantly withdraw the overcontribution as quickly as she realized about it.
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As for counting on the recommendation of her financial institution, the decide famous the CRA failed to offer any evaluation of why, in these circumstances, the taxpayer, counting on the faulty recommendation of her monetary adviser, had not made an inexpensive error. In a 2020 case involving a non-resident taxpayer who had overcontributed to her TFSA on the faulty recommendation of her financial institution, the decide ordered the matter returned again to the CRA for reconsideration.
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Within the present case, the decide allowed the taxpayer’s software, setting the CRA’s choice apart, and ordered an impartial assessment to be carried out “anew” by a unique CRA officer.
The decide acknowledged it’s attainable that “the results of the brand new assessment would be the similar,” however in that case the taxpayer might then “search redress for her losses from (her financial institution).” In spite of everything, “it’s fairly incomprehensible how anybody might advise a shopper whose earnings is so low that no earnings tax is payable to spend money on a TFSA. It’s pointless, as a TFSA is a mechanism to shelter earnings from tax.”
Jamie Golombek, CPA, CA, 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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