TFSA Not so Simple for Some
When it was first announced, it seemed so simple.
You contribute up to $5,000 of after-tax funds to a tax-free savings account, invest in anything you want, and the income or gains accrue taxfree for life and can be withdrawn tax-free at any time, for any reason.
Miss a year? No problem because the $5,000 annual contribution limit automatically carries forward for life. Need to withdraw funds? Piece of cake - you can recontribute them beginning the following year.
Sounds like a walk in the park, right?
You would think so, but in 2009, the inaugural year of the TFSA, of 4.8 million Canadians who opened a TFSA, 72,786 (1.5%) received a letter in 2010 from the Canada Revenue Agency about possible excess contributions.
This was the subject of new special report titled Knowing the Rules issued this week by the Taxpayers' Ombudsman.
The role of the ombudsman includes conducting "impartial and independent reviews of service-related complaints about the CRA," as well as identifying and reviewing "systemic and emerging service-related issues within the CRA that have a negative impact on taxpayers."
The special report, subtitled Confusion about the rules governing the TFSA, was prompted in part by numerous media reports (several by yours truly) on the difficulties experienced by taxpayers who found themselves in a TFSA overcontribution situation, facing penalties of 1% per month of overcontribution, many through no apparent fault of their own.
The issue was a lack of awareness of when a TFSA withdrawal can be recontributed. The ombudsman received complaints from taxpayers who complained that "TFSA rules regarding withdrawals and overcontributions were confusing."
The ombudsman's office began its review in June 2010, but delayed issuing a report until now while the CRA was updating information on its website and training its staff on the TFSA.
The conclusion was that the CRA "should have been more proactive in informing Canadians about the tax consequences of the TFSA."
The CRA, in response to the report, issued a news release welcoming it as an opportunity to improve its services and developed an action plan to address the recommendations, which includes updated TFSA web pages, the issuance of relevant tax tips, community newspaper articles, and communications to financial institutions.
Taxpayers who are still uncertain of how TFSAs work should also seek the advice of a reputable financial advisor well-versed in the intricacies of what first appeared to be a simple, new savings option for Canadians.