Moving TFSA to a different institution was expensive
You likely know that the Tax-Free Savings Account (TFSA) allows you to contribute a certain amount for each year since 2009 that you were over 18, and that all the profits in a TFSA accumulate tax-free, whether they are earned as interest, dividends or capital gains. And that there is no cost to taking money out of a TFSA to use for any purpose — no withholding tax applies, and no tax will be payable on your tax return for the year as a result of the withdrawal.
You may also know that if you take an amount of money out of your TFSA, you can put the same amount back in later — but only starting the next January 1. Otherwise, you are over-contributing, and you may be liable for a penalty tax of 1% per month of the overcontribution.
In a recent Federal Court decision, Breton v. Canada, 2024 FC 555, Mr. Breton, who lived in Quebec, accidentally ran afoul of this rule in an interesting way. He had $40,000 in a TFSA with Caisse Desjardins, and decided to transfer this TFSA to the Banque Nationale. But instead of completing a form to have the transfer take place directly between the two institutions, he simply took the $40,000 out of his Caisse Desjardins TFSA and deposited it to a TFSA at Banque Nationale — without waiting until the next January 1.
The CRA assessed Mr. Breton over $2,000 penalty tax on his overcontribution. He applied for a waiver this tax, which the CRA has the power to grant if the taxpayer made a “reasonable error” and promptly withdraws the overcontribution.
The CRA refused to waive the tax. CRA policy is that taxpayers should know how the TFSA rules work, and that they have to wait until January 1 if they withdraw funds from a TFSA, before redepositing them.
Mr. Breton filed an application for “judicial review” in the Federal Court. In such an application, the Court is not allowed to substitute its own judgment as to whether the tax should be waived. All it can do is ensure that the CRA reached a “reasonable” decision and explained its reasons in a way that is “transparent, intelligible and justified”. If the CRA didn’t, the Court can send the matter back to the CRA for a new decision.
The judge had sympathy for Mr. Breton’s situation, but dismissed the application for judicial review. The CRA is entitled to have, and to follow, a policy of refusing to waive the penalty tax in cases where the taxpayer simply did not understand the TFSA rules.
Like many other such decisions, this Court case is a warning to taxpayers to make sure they follow the rules when withdrawing funds from a TFSA!