August 2021 Newsletter

Penalty for over-contribution to TFSA upheld

As our readers are likely aware, the income tax rules allow you to contribute to certain tax-deferred plans, such as registered retirement savings plans and tax-free savings accounts (TFSAs). The plans are called tax-deferred plans because the investment income earned in the plans is exempt from tax while in the plan. With an RRSP, amounts withdrawn from the plan are fully included in income (since you get a deduction when you contribute to the plan), while TFSA withdrawals are generally tax-free (since you do not get a deduction when you contribute to the plan).

The tax-deferred plans have monetary limits in terms of how much you can contribute to the plan. If you go over the limits, you may be liable for a penalty tax and interest. There are some relieving provisions, one of which was the subject of the recent Posmyk case.

In this case, the taxpayer overcontributed to his TFSA and the Canada Revenue Agency assessed a penalty. The taxpayer appealedto the Tax Court of Canada.

In general terms, the relieving provision that potentially applied to the taxpayer required that the over-contribution was made “as a consequence of a reasonable error”, and that he withdrew the over-contribution from the TFSA “without delay”. One of the taxpayer’s arguments was that he did not have home internet access during the taxation years in question (his choice) and therefore only checked his email on occasion at the local library and did not receive CRA notifications about his over-contributions.

In its decision, the Tax Court was sympathetic with the taxpayer. The Court held that he withdrew the amount without delay. Unfortunately, his over-contribution was found not to be as a consequence of reasonable error, so that the penalty was upheld. His decision not to have internet access did not change this result. Basically, the Court was saying he was responsible for knowing the TFSA contribution limits even though he did not receive or was not aware of CRA notifications.

The lesson is learned?

If you have provided your email address to the CRA, then the CRA will not send you paper copies of any letters, Notices of Assessment, or other communications. You will instead get an email notice telling you to log into “My Account” to read your CRA mail. If you miss that message and don’t check “My Account” regularly, you may miss important mail and run into serious tax problems as a result!

Last modified on August 13, 2021 12:00 am
Subscribe to the monthly newsletter