Judge urges CRA to consider leniency after inadvertent TFSA deposit leads to $2,370 penalty
TFSAs have been in existence for more than a decade and Canadians have embraced the tax-free nature of these vehicles, contributing, based on 2016 tax data released by the Canada Revenue Agency, nearly $55 billion by way of over 113 million separate TFSA contribution transactions in the 2016 tax year alone.
While it’s not surprising that mistakes can and will occur among such a large volume of individual TFSA contributions, what’s troubling is the seemingly relentless pursuit of taxpayers who may have inadvertently overcontributed to their TFSAs and who are now facing overcontribution tax, penalties and arrears interest, assessed by the CRA.
As regular readers of this column will know, overcontributing to your TFSA can be costly. The overcontribution tax is calculated at one per cent per month, multiplied by the overcontribution amount for each month you’re over the limit. In addition, you are required to report the overcontribution on a special return, the “RC243 Tax-Free Savings Account (TFSA) Return,” which is due by June 30 following the year of overcontribution.
If you’re late filing that return, the penalty is five per cent of the balance owing (i.e. the overcontribution tax) plus an additional one per cent for each full month that the return is late, to a maximum of 12 months. If you were charged a late-filing penalty on a return for any of the three previous tax years, your penalty doubles to 10 per cent, plus two per cent for each month up to a maximum of 20 months. In addition, non-deductible arrears interest, compounded daily at the current rate of six per cent, is charged from July 1 following the year overcontribution.
While it used to be the CRA’s practice to automatically assess the TFSA overcontribution tax, that changed in 2016. Since then, in response to numerous innocent overcontribution errors, the CRA’s policy changed and it now will send a warning letter to a first-time overcontributor and only assess the overcontribution tax if they do not remove the excess contribution from their TFSA. After the first violation, however, taxpayers are assessed the overcontribution tax without notice.
And that’s exactly what happened in the most recent TFSA overcontribution case to find its way to Tax Court last month. The case involved a taxpayer who inadvertently contributed $40,000 to his TFSA in 2016. The taxpayer was hit with a $2,370 overcontribution tax, a penalty of $118 for failure to file the special TFSA return, along with arrears interest of $4.
At the hearing, the taxpayer described the “inadvertent deposit of $40,000 to his TFSA as a simple case of human error,” which the judge acknowledged was “an accurate characterization of the unusual facts of this case.”
The taxpayer owned a roofing company in Timmins, Ont., which was busy during the summer and inactive during the winter. The taxpayer testified that his father “takes care of all the numbers,” acted as bookkeeper for his son’s roofing business and administered everything associated with the company, including financial matters. Indeed, the taxpayer’s father was his son’s authorized representative in dealing with the CRA and represented his son at the hearing.
When customers paid the roofing company, the funds were deposited to the company’s bank account by the taxpayer’s father. In 2016, a management fee was paid via a cheque issued by the corporation to the taxpayer which he “was supposed to deposit… into (his) chequing account.”
But, because the taxpayer worked during the days throughout the summer, he made the deposit at night. According to the testimony, on the night of July 21, 2016, the taxpayer went to a bank machine to deposit the cheque to his chequing account but instead, he inadvertently deposited it into his TFSA.
The taxpayer was adamant that this was an accident, saying: “Nobody deposits 40 grand into a (TFSA) — I know the rules. I had been warned the year before about an overcontribution. So I didn’t want to do that mistake again.” Apparently, the prior year the taxpayer also overcontributed to his TFSA to the tune of $5,000. He was sent a warning letter from the CRA with respect to the excess TFSA amount at the end of 2015. He withdrew the excess immediately upon receipt of that letter.
The error remained undetected for many months as there was enough money in the taxpayer’s chequing account to fund the cheques he wrote and no cheques bounced after July 21, 2016. Thus, he had “no reason to believe that the $40,000 cheque had not been deposited to his chequing account.”
Indeed, it wasn’t until June 2017 that the error first came to light when the taxpayer’s father spoke to a CRA official about a tax matter relating to the roofing company. After that discussion, the CRA official mentioned that his son had overcontributed to his TFSA by $39,500. The CRA official then told the taxpayer’s father that a withdrawal of $29,000 would make the TFSA compliant so the taxpayer withdrew $29,000 from his TFSA that same day.
Under the Income Tax Act, the CRA has the power to waive or cancel the overcontribution tax if it can be established that the tax arose “as a consequence of a reasonable error” and the overcontribution is withdrawn from the TFSA “without delay.”
If there ever was a case of “reasonable error,” this sounds like just that case. Unfortunately, however, the Tax Court judge was unable to cancel the overcontribution tax as that can only be done at the CRA’s discretion. That being said, the judge urged the CRA to consider exercising its discretion to cancel the overcontribution tax. “Such cancellation would find ample support on the extraordinary facts of this case,” the judge said.
Let’s hope the CRA does the right thing.