INTRODUCTION – TAX PENALTY AND INTEREST RELIEF FOR
OVERCONTRIBUTIONS TO A TFSA
As of 2009, Canadian tax residents over 18 years old have been
entitled to establish a tax-free savings account (“TFSA”).
Unlike a Registered Retirement Savings Plan (“RRSP”), you
are not entitled to deduct your contributions to a TFSA against
your income. In turn, the withdrawals made from a TFSA will be
tax-free. Thus, a Canadian taxpayer does not pay tax on interest,
dividends, capital gains or other income that accumulates within a
TFSA.
The TFSA is a powerful tax planning tool for families and
individuals to begin saving for retirement or significant life
purchases, like a family home. Your ability to contribute to a TFSA
is not unlimited, however, and is capped by the Canadian Income
Tax Act. For each year that a Canadian tax resident has been eligible to
establish a TFSA, the dollar limit for contributions increases by
roughly $5,000 to $6,000 per year, with rates gradually adjusted
for inflation. The dollar limit is cumulative, and so an
individual’s contribution room will increase every year, even
if a TFSA was never opened by or contributed to by an
individual.
Excess contributions above an individual’s TFSA dollar
amount can generate significant tax penalties. If, at any time
during the year, you make a TFSA contribution that exceeds your
TFSA contribution room, subsection 207.02(1) of the Income Tax
Act imposes a penalty tax on that excess contributed amount at
a rate of 1{c024931d10daf6b71b41321fa9ba9cd89123fb34a4039ac9f079a256e3c1e6e8} per month. You must also file a special tax return
reporting the TFSA penalty tax (Form RC243, “Tax-Free
Savings Account Return” and Form RC243-SCH-A, “Schedule A
– Excess TFSA Amounts”), and you may suffer additional
penalties for failing to file this return should you be aware of
the overcontributed amounts. The penalty tax is also subject to
interest at the prescribed rate.
The Canada Revenue Agency (“CRA”) is granted the power
to waive some or all of an individual’s accrued penalties and
interest for excess contributions to a TFSA under the Income
Tax Act. More specifically, subsection 207.06(1) of the
Income Tax Act provides that the CRA may exercise its
discretion if the taxpayer establishes that the liability was:
- The consequence of a reasonable error; and
- The excess TFSA amounts are removed from the TFSA without
delay.
Both elements of the test must be satisfied before the CRA is
entitled to provide relief. The case of Singh v. Canada,
2022 FC 346 (“Singh”) demonstrates that, even if the
circumstances a taxpayer faces are sympathetic, that it may not be
enough for the CRA to offer discretionary relief from penalties and
interest for overcontributions to a TFSA. The taxpayer in
Singh escaped the worst of TFSA overcontribution penalties
and interest given the amount of money involved. However, had the
taxpayer been more diligent with managing her tax affairs, she may
have been able to avoid years of litigation. If you are ever in
doubt concerning your TFSA contributions or what opportunities may
exist under the Income Tax Act to benefit from CRA’s
relief programs, you should be proactive and consult an expert
Canadian tax lawyer.
THE FACTS OF SINGH
The Appellant taxpayer received $41,000 in proceeds from the
sale of her house following her divorce from her husband. On the
advice of her bank advisor, she moved those funds into her TFSA.
However, the taxpayer failed to obtain expert Canadian tax advice
and therefore made two crucial errors:
- The taxpayer’s contribution room was well below $41,000 in
the year that she moved the funds into her TFSA. The bank advisor
had failed to explain to the taxpayer that there was a contribution
limit to TFSA accounts.
- Following the sale of her former house, the taxpayer’s
husband filed her tax returns. The taxpayer’s husband failed to
update her mailing address with the CRA, and the taxpayer never did
so herself. She thus missed any letters the CRA had sent her
concerning her overcontributions.
The taxpayer continued contributing funds to her TFSA throughout
2016 and 2017. On the taxpayer’s 2017 notice of assessment, she
was notified that she owed $3,733.04 in tax, interest and penalties
on her excess TFSA contributions. The taxpayer moved to pay the
outstanding amount immediately when she had learned of the
fact.
The taxpayer applied for relief under CRA’s Taxpayer Relief
Program twice in 2019, unsuccessfully. After exhausting CRA’s
internal review options, the taxpayer launched a self-represented
appeal to the Federal Court for judicial review of the CRA’s
decision concerning her second taxpayer relief application. The
taxpayer argued that the CRA’s decision to decline awarding
relief from penalties and interest was unreasonable.
THE RULING OF THE FEDERAL COURT OF CANADA
On judicial review, the Canadian tax litigation lawyer for the
CRA argued that the taxpayer’s error was not a reasonable
error. The Federal Court observed that the applicable standard for
judicial review followed from the Supreme Court of Canada’s
decision in Canada (Minister of Citizenship and Immigration) v.
Vavilov, 2019 SCC 65. Specifically, under the Vavilov
framework, a reviewing court must consider whether the CRA’s
reasoning process, in light of the experience of its delegate,
suffered from a “failure of rationality internal to the
reasoning process”, or whether the decision was
“untenable in light of the relevant factual and legal
constraints.” Absent an exceptional case, a reviewing court
will not interfere with the factual findings made by a
decision-maker, and the reviewing court must treat the decision
made with deference.
In applying the Vavilov framework, the Federal Court
found that the CRA’s decision to deny relief was reasonable.
The taxpayer argued that she had not made the mistakes
purposefully, and that the wrongful advice of her bank advisor
combined with her husband’s failure to update her mailing
address prevented her from receiving the letters from the CRA
advising her of her TFSA contributions, which would have prompted
her to correct the matter. The Federal Court concluded, however,
that the CRA acted reasonably in finding that the taxpayer was
ultimately responsible for meeting her obligations under the law.
The assessment of a reasonable error falls on an objective view of
a taxpayer’s circumstances. Specifically, the issue concerning
her bank advisor’s failure to communicate TFSA contribution
limit rules to her was an issue solely between herself and her
bank. Further, the CRA is only obligated to show that notice is
sent to the latest address of a taxpayer, and not receipt of
notice, to hold a taxpayer accountable for taxes owing. The nature
of Canada’s self-assessment system for taxes required that
taxpayers act diligently in reporting to CRA and acting in response
to CRA’s communications. Intent may be a factor that can be
considered by CRA in finding whether an error was reasonable or
not, but is unlikely to constitute a reasonable error in of
itself.
PRO TAX TIP: KEEP YOUR INFORMATION WITH THE CANADA REVENUE
AGENCY UP-TO-DATE
As discussed above, the CRA’s power to waive penalty tax on
TFSA overcontributions is largely a discretionary power. Although
the CRA is required to view every situation holistically and on its
own facts, it has expressed that an error is more likely to be
viewed as reasonable where it was the result of extraordinary
circumstances beyond a taxpayer’s control. More specifically,
this might include cases where a taxpayer is facing a serious
illness, or where the actions of the CRA itself resulted in the
error.
The CRA has consistently taken the position that ignorance of
law alone will not constitute a reasonable error. A lack of
awareness concerning a taxpayer’s TFSA contribution room
therefore may not meet the threshold of reasonable error. And as
can be seen in the case of the taxpayer in Singh, the
failure to update your mailing address to receive letters on-time
from CRA is also not a reasonable error. It is your responsibility
to remove over-contributions from your TFSA account as soon as you
are aware of the error. The CRA will treat any letter that it sends
to a taxpayer as effective notice of their over-contributions. It
is absolutely crucial that you ensure your information with CRA is
up-to-date and current so that you do not miss any letters. Your
mailing address provided to CRA is not a declaration of your
residence status and is only an administrative matter used to
ensure that you receive communications from the CRA. Should you
receive a letter from the CRA about over-contributions to your TFSA
account, you should immediately speak with one of our expert Canadian tax lawyers to discuss your options
for applying for relief from TFSA overcontribution penalty tax.
FAQs
What are the TFSA over-contribution rules?
Excess contributions to your tax-free savings account result in
a TFSA penalty tax. If, at any time during the year, you make a
TFSA contribution that exceeds your TFSA contribution room, you
incur an TFSA penalty tax on the excess amount at a rate of 1{c024931d10daf6b71b41321fa9ba9cd89123fb34a4039ac9f079a256e3c1e6e8} per
month. You must also file a special tax return reporting the TFSA
penalty tax (Form RC243, “Tax-Free Savings Account
Return” and Form RC243-SCH-A, “Schedule A – Excess TFSA
Amounts”), and you may suffer an additional penalty for
failing to file this return. The penalty tax is also subject to
interest at the prescribed rate.
What are the conditions for obtaining relief from TFSA
overcontribution penalties and interest under the Income Tax
Act?
The Canada Revenue Agency (“CRA”) is granted the power
to waive some or all of an individual’s accrued penalties and
interest for excess contributions to a TFSA under the Income
Tax Act. More specifically, subsection 207.06(1) of the
Income Tax Act provides that the CRA may exercise its
discretion if the taxpayer establishes that the liability was:
- The consequence of a reasonable error; and
- The excess TFSA amounts are removed from the TFSA without
delay.
Both elements of the test must be satisfied before the CRA is
entitled to provide relief.
What was the Federal Court’s judgement in Singh v.
Canada, 2022 FC 346?
The Federal Court found that the CRA had acted reasonably in
denying the taxpayer relief from TFSA over-contribution penalty
tax. The taxpayer had failed to update her mailing address after
moving from her family home and had received erroneous advice from
her bank advisor about TFSA contribution limits. The CRA found that
her ignorance of the tax law was not a reasonable error, and that
it was her responsibility to update her mailing address to receive
communications from the CRA notifying her of her
over-contributions. Although the taxpayer never intended to
over-contribute, the Federal Court found the CRA was justified in
concluding that the over-contributions were not the result of a
reasonable error.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
