If you filled in your email address on the front page of your T1 personal tax return, you have officially registered to receive most Canada Revenue Agency communications via email notification. This means the onus is on you if you forget to check your email and miss an important communication, which could end up costing you big time should you miss a CRA notice of reassessment.
Take, for example, a recent tax case decided in early October which involved yet another taxpayer who overcontributed to his tax-free savings account (TFSA). The taxpayer was in Federal Court requesting a judicial review of the CRA’s decision in which the agency refused to waive the overcontribution taxes he had incurred because of overcontributing to his TFSA during the 2021 taxation year.
Under the Income Tax Act, the CRA may exercise its discretion to waive or cancel the overcontribution tax if a reasonable error resulted in the excess contribution, and action was taken right away to remove the excess contribution.
On July 20, 2021, the CRA issued a TFSA notice of assessment (NOA) for the taxpayer’s 2020 tax year advising him that he had overcontributed to his TFSA in October, November, and December of 2020. The tax was calculated based on one per cent per month of the overcontributed amount.
The taxpayer was also told that to limit future penalty tax, he should immediately withdraw from his TFSA any excess amount that may be held there. In addition, the taxpayer was cautioned that he had “negative contribution room” for 2021 because the overcontribution he had made in the 2020 tax year exceeded his 2021 TFSA contribution limit.
On July 26, 2022, the CRA issued to the taxpayer a second TFSA notice of assessment (NOA), this time for the 2021 tax year. The 2021 NOA showed that the taxpayer never withdrew the overcontributions that were first reported in the 2020 NOA, but instead made “significant additional contributions” to this TFSA account in 2021. As a result, the amount due in tax and penalties was assessed to be a whopping $57,623.
In late September 2022, the taxpayer received a collection notice from the CRA, which prompted him to log in to his CRA My Account online portal, which made him aware of the amount due. It turns out the taxpayer never saw the original 2020 NOA until Sept. 29, 2022. He said he had not received a letter or email, suggesting that perhaps an email notice from the CRA may have been routed to his junk email folder. The taxpayer stated he was unaware that TFSA contributions were limited, and it was “impossible for him to withdraw the overcontributions as he had lost those funds.”
The CRA rejected the taxpayer’s request to cancel the penalty tax for several reasons.
First, the taxpayer’s TFSA contributions continued after the issuance of the 2020 NOA. Second, the taxpayer had indicated that his delivery preference for CRA correspondence was by way of email and email notices were indeed sent to the email address provided, and that where notices are eligible for electronic delivery, they are not printed and mailed. And, finally, while the CRA officer did acknowledge that the taxpayer’s funds in this particular TFSA had been lost and therefore could not have been withdrawn, the CRA’s records indicated that the taxpayer still had other active TFSAs from which the overcontribution could have been withdrawn.
As a result, the CRA officer refused the taxpayer’s request for relief.
Shortly thereafter, the taxpayer again wrote to the CRA requesting it cancel or waive the assessed tax, reiterating that his overcontribution was “a mistake and he was unaware of contribution limits.”
The CRA again refused the taxpayer’s second request to cancel or waive the assessed taxes. While the second reviewing officer acknowledged that the excess contributions were not intentional, the officer concluded they were not the result of a reasonable error, noting that it is the taxpayer’s responsibility in a self-assessment tax system to maintain records, review statements and, when necessary, request information.
The taxpayer turned to the federal court asking a judge to determine whether the CRA’s decision refusing his request to cancel the assessed tax was “reasonable.” As we learned from prior cases, a reasonable decision is one that is “internally coherent, follows a rational chain of analysis, and is justified in relation to the facts and the law that constrains the decision-maker.”
In submissions before the court, the taxpayer reiterated that he was unaware of TFSA contribution limits and that he was a novice investor, and asserted that his TFSA now contained a zero balance. He acknowledged his actions resulted in the overcontribution, but submitted that his “misunderstanding and the compassionate nature of his circumstances justify relief.”
While the judge was sympathetic to the taxpayer’s circumstances, he found that the taxpayer had not demonstrated that the CRA’s decision was unreasonable.
The CRA officer had concluded that the taxpayer’s excess TFSA contributions, while not intentional, were not the result of a reasonable error. Furthermore, all available TFSA funds had not yet been removed from the taxpayer’s active TFSAs.
As the judge wrote, “The fact that the taxpayer did not have actual knowledge of the excess contribution in the 2020 tax year until September 2022 does not raise an issue of fairness. … The (taxpayer) does not dispute that the CRA notified him of the 2020 and 2021 NOAs electronically, as specified by his selected method of delivery. Having selected electronic notice, the (taxpayer) cannot argue that notice was insufficient, particularly where he acknowledges a failure to check his account regularly.”
To avoid this problem, David Sherman, a tax lawyer and author, recommends that all taxpayers set up an automated reminder to check their CRA email for all accounts (personal income tax, GST/HST, corporate, plus any others) once a month, in case you have been notified of something you have to deal with.
Failure to do so can be costly.