CRA’s TFSA guidelines land two extra taxpayers in sizzling water

Article content material

The tax-free financial savings account (TFSA) was launched again in 2009 and designed to be a really easy financial savings automobile. You contribute after-tax {dollars} to the account and make investments them in just about something, with any progress contained in the account being tax free. You may withdraw funds everytime you need, for any objective. If that’s not sufficient, the complete honest market worth of no matter you withdraw might be recontributed starting the next calendar 12 months.

Article content material

With all these advantages, and the simplicity inherent within the account design, what may probably go mistaken? Rather a lot judging by the variety of circumstances we’ve seen over the previous decade for the reason that TFSA’s launch. Some circumstances contain penalties charged for unintentional TFSA overcontributions, whereas others concerned taxpayers who acquired caught by the TFSA benefit guidelines.

Article content material

Let’s take a look at two latest circumstances, one involving a taxpayer who overcontributed, and one that includes a taxpayer who challenged the constitutionality of the TFSA’s 100-per-cent benefit tax.

The primary case concerned an 83-year-old, self-represented Saskatchewan taxpayer who took the Canada Income Company (CRA) to courtroom over his TFSA overcontributions. As a reminder, for those who by accident overcontribute to your TFSA past your most, you will get hit with an overcontribution penalty tax that is the same as one per cent per 30 days for every month you’re over the restrict.

Article content material

You may ask the CRA to waive or cancel this penalty tax if it may be established that it arose “as a consequence of an affordable error” and the overcontribution is withdrawn from the TFSA “immediately.” If the CRA refuses to cancel the tax, you’ll be able to take the matter to federal courtroom, the place a decide will decide whether or not the CRA’s resolution to not waive the tax was affordable. That’s precisely what the taxpayer did on this most up-to-date case.

The taxpayer admitted to unknowingly overcontributing to his TFSA throughout 2016 and 2017. On Jan. 1, 2016, the taxpayer had TFSA contribution room of roughly $27,500, however contributed $46,500 that 12 months, exceeding his contribution room by $19,000. Consequently, the CRA in July 2017 issued a Discover of Evaluation in respect of his TFSA overcontribution for the 2016 taxation 12 months and charged him a penalty tax.

Article content material

The 2017 TFSA greenback restrict was $5,500, so on Jan. 1, 2017, he exceeded his contribution room by $13,500. The CRA in July 2018 issued the taxpayer a second Discover of Evaluation in respect of his TFSA overcontribution for the 2017 taxation 12 months, once more charging a penalty tax.

For 2018, the TFSA greenback restrict was additionally $5,500, so he exceeded his contribution room by $8,000 on Jan. 1, 2018. In a letter despatched in September 2018, the TFSA Processing Unit on the CRA really useful the taxpayer withdraw the surplus contributions from his TFSA as quickly as doable to cease the month-to-month one-per-cent penalty tax from persevering with, and the taxpayer on Oct. 1, 2018, withdrew $9,000 from his TFSA.

Per week later, the taxpayer submitted a primary request for taxpayer aid for his TFSA overcontribution, claiming he was not liable for the error as a result of he was not knowledgeable by his financial institution or the CRA that he was overcontributing. He additionally claimed he was unaware that withdrawals he constituted of his TFSA have been solely added to his contribution room the next calendar 12 months.

Article content material

In January 2019, the CRA denied his request for aid, so the taxpayer requested for a second-level evaluate, which was once more denied in June 2019. In denying the second request, the CRA officer famous the taxpayer didn’t take away the surplus contributions from his TFSA for 2016 and 2017 till Oct. 1, 2018, which was not quick sufficient.

The taxpayer then turned to the Federal Court docket, asking it to evaluate whether or not the CRA’s resolution denying him aid was affordable. In courtroom, the taxpayer’s main argument was that the CRA failed “to manage the earnings tax system pretty and fairly.”

He defined he didn’t instantly withdraw his extra TFSA contributions as a result of he was ready for responses from the CRA to his questions. He additionally felt the CRA has “an obligation of care to have a system that doesn’t permit overcontribution.”

Article content material

However these arguments, the decide discovered the CRA had fairly responded to his questions. She concluded the CRA officer’s resolution to disclaim penalty tax aid was affordable. “Though (the taxpayer) was notified of his overcontributions, he didn’t act immediately to take away the surplus contributions from his TFSA,” the decide mentioned.

The second latest case involving the TFSA penalty tax was on the Tax Court docket and anxious the “benefit guidelines,” that are a collection of anti-avoidance guidelines within the Revenue Tax Act designed to forestall abuse and manipulation of all registered plans, together with TFSAs. If you end up offside these guidelines, you could possibly face a 100-per-cent penalty tax on the honest market worth of any “benefit” you obtain that’s associated to a registered plan.

Article content material

On this case, the taxpayer was interesting reassessments by the CRA on his TFSA ensuing from the benefit he acquired concerning the switch of personal firm shares to his TFSA. The taxpayer requested the courtroom to find out whether or not the penalty tax was a penalty or a tax, and whether or not it ought to be declared unconstitutional as a consequence of Parliament having improperly delegated the rate-setting ingredient of that tax to the CRA, in contravention of the Structure Act.

Article content material

Maybe not surprisingly, the courtroom, after a prolonged authorized evaluation, held that the benefit tax is, certainly, a tax and, moreover, is validly imposed. It additionally concluded it’s not unconstitutional, for the reason that CRA doesn’t set the tax charge; it merely has the discretion to waive or cancel “all or a part of the tax.” Because the courtroom wrote, “No matter delegation of taxation energy there could also be is merely, ministerial discretion, itself sufficiently constrained to permitted administrative duties.”

The taxpayer has appealed this resolution to the Federal Court docket of Enchantment, which is able to possible hear the case someday in 2023.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Personal Wealth in Toronto. Jamie.Golombek@cibc.com

_____________________________________________________________

 When you like this story, join the FP Investor Publication.

_____________________________________________________________