With the 2020 tax season behind us, the focus should now turn to how to minimize taxes on investment income for 2021. A good place to start is ensuring your TFSA is fully topped up. This year, you can contribute another $6,000 to your TFSA, bringing the cumulative contribution limit to $75,500 for someone who has been a resident of Canada since the TFSA’s inception in 2009.
It’s critically important to track your TFSA contribution room, lest you overcontribute and face a penalty tax equal to one per cent per month for each month you’re over the limit. If you accidentally overcontribute, you can request that the Canada Revenue Agency waive or cancel the tax, which it has the power to do if it can be established that the tax arose “as a consequence of a reasonable error” and the overcontribution is withdrawn “without delay.”
But just because you ask for relief doesn’t mean the CRA will grant it.
If the CRA refuses, you can take your case to Federal Court, asking a judge to review whether the CRA’s decision was reasonable. That’s what happened in the most recent TFSA overcontribution case involving a Burnaby, B.C. taxpayer who was hit with a penalty tax of $1,165 for overcontributing to his TFSA for the 2017 and 2018 tax years. The case was heard by teleconference in early April.
The taxpayer’s troubles began in 2015, when he changed his CRA account preferences to allow correspondence to be sent by e-mail. In a May 17, 2018 “educational letter” that the CRA sent via email, the taxpayer was notified he had overcontributed to his TFSA by $9,465, and that he should remove the amount “right away” or face the overcontribution tax.
The taxpayer claims he never received the email, yet there was no evidence on CRA’s part to show the email had bounced back.
The taxpayer subsequently received a paper notice of a penalty on a TFSA notice of assessment (NOA), issued on July 16, 2019, which was mailed to his home address. The taxpayer took action shortly thereafter to withdraw TFSA funds to correct the overcontribution and stop the penalty tax from increasing.
In September 2019, the taxpayer wrote to the CRA asking for the cancellation of the penalty, claiming he was not made aware of it. He suggested that any emails might have gone to his junk mail folder, and that had he received a physical educational letter, he would have acted to correct the mistake as he was accustomed to working with “paper letters.” The CRA rejected his request, stating that he was indeed notified of his overcontribution, yet continued to make excess contributions in 2018.
In December 2019, the taxpayer again wrote to the CRA asking for an independent review of their decision, echoing his previous arguments. The CRA again rejected his request, noting that it was “(the taxpayer’s) responsibility to ensure that his email was correct, and to provide updates if there were changes.” The letter further stated that the CRA is “not liable if he is unable to access the emails, or for any inability or delay in the receipt of notifications.”
The taxpayer then turned to the Federal Court asking for a judicial review of the CRA’s decision. In a judicial review, a judge is tasked with determining whether the CRA’s decision was “rational and logical.” “(It) must bear the hallmarks of reasonableness — justification, transparency and intelligibility.”
The taxpayer’s main argument was that due to several “ambiguities,” he should not be hit with the penalty tax. He claimed that the drop in TFSA limits from $10,000 (in 2015) to $5,500 (2016) in a single year created ambiguity. He added this was compounded by the fact that the CRA no longer states TFSA contribution room on annual notices of assessment for tax returns.
He argued that he wasn’t “properly notified” of his overcontribution until “years later,” adding that something important like the education letter alerting him to the overpayment should not have been by email, given that when CRA “wanted their money” they then provided him the letter in writing. Had he received the educational letter sent by email, he would have withdrawn the money then and not been subject to the penalty, he argued.
Finally, he maintained that he has not “in any way damaged the Canadian Treasury,” and that he has not benefitted from the overcontribution as he has suffered a $13,000 loss on the account. “The nature of the TFSA is stated as an instrument to aid and assist Canadians to save money, and this penalty does not forward that stated goal.”
At trial, the CRA argued that “honest mistakes do not absolve ignorance of the law” and cited a prior TFSA overcontribution case about a Canadian Forces member who did not receive correspondence from the CRA and was nevertheless assessed overcontribution tax, which was upheld. Because the taxpayer in the current case signed up for online mail, “it was his responsibility to ensure he was checking his correspondences, and that it is irrelevant that the CRA stopped putting limits on notices of assessment…(K)eeping track of changes to his CRA account and TFSA contribution levels… must be seen as his responsibility, and not that of the CRA.”
The judge was sympathetic, calling the taxpayer’s situation “very unfortunate” and the result of “a genuine mistake.” That being said, “(the taxpayer’s) mistake, both in overcontributing to his TFSA, and then in not monitoring his communications, should not be transferred to the CRA.” The judge ruled that the CRA’s decision to deny relief was “reasonable, justified, transparent and intelligible.”
As the judge wrote, “Our Canadian system of taxation is on a self-reporting basis. For this reason, the onus is on the taxpayer to declare and be aware of all their taxation limits and assessments.”
In a minor victory for the investor, the judge refused the CRA’s request to be awarded costs in the case.