Overcontributing to a TFSA can be costly. The penalty tax is calculated at 1% per month, multiplied by the overcontribution amount for each month a contributor is over the limit. In addition, the overcontribution must be reported on the RC243 Tax-Free Savings Account Return, a form that’s due by June 30 following the year of overcontribution.
Filing the RC243 return late can lead to a penalty of 5% of the balance owing (i.e., the overcontribution tax) plus an additional 1% for each full month that the return is late, to a maximum of 12 months. In addition, non-deductible arrears interest, compounded daily at the current rate of 6%, is charged from July 1 on, following the year of overcontribution.
It used to be the CRA’s practice to automatically assess the TFSA overcontribution penalty. In response to numerous innocent overcontribution errors, the agency changed its policy in 2016. The CRA now sends a warning letter to first-time over-contributors and only assesses the penalty tax if the taxpayer does not remove the excess contribution from their TFSA.
After the first violation, however, taxpayers are assessed the overcontribution tax without notice.
That’s exactly what happened in the most recent TFSA overcontribution case (Robitaille v The Queen, 2019 TCC 200) to find its way to Tax Court. The case involved a taxpayer who inadvertently contributed $40,000 to his TFSA in 2016. The taxpayer was hit with a $2,370 overcontribution tax and a penalty of $118 for failure to file the special TFSA return, along with arrears interest of $4.
At the hearing, the taxpayer described the “inadvertent deposit” of $40,000 to his TFSA as a “simple case of human error,” which the judge acknowledged was “an accurate characterization of the unusual facts of this case.”
The taxpayer — who owned a roofing company in Timmins, Ont. — testified that his father “takes care of all the numbers,” acting as bookkeeper for his son’s roofing business and administering everything associated with the company, including financial matters. Indeed, the taxpayer’s father was his son’s authorized representative in dealing with the CRA and represented his son at the hearing.
When customers paid the roofing company, the funds were deposited to the company’s bank account by the taxpayer’s father. In 2016, a management fee was paid via cheque issued by the corporation to the taxpayer, which he was supposed to deposit into his chequing account. According to the testimony, the taxpayer inadvertently deposited the cheque into his TFSA using a bank machine.
The taxpayer was adamant that this was an accident, saying: “Nobody deposits 40 grand into a [TFSA] — I know the rules. I had been warned the year before about an overcontribution. So I didn’t want to do that mistake again.”
The prior year the taxpayer had overcontributed $5,000 to his TFSA and received a warning letter from the CRA. He withdrew the excess immediately upon receipt of that letter.
The second error remained undetected for months. There was enough money in the taxpayer’s chequing account to fund the cheques he wrote; since no cheques bounced, he had “no reason to believe that the $40,000 cheque had not been deposited to his chequing account.”
It was almost a year after the cheque was mis-deposited that the error came to light, in June 2017, when the taxpayer’s father spoke to a CRA official about a tax matter relating to the roofing company. After that discussion, the CRA official mentioned that his son had overcontributed to his TFSA by $39,500. The CRA said a withdrawal of $29,000 would make the TFSA compliant, so the taxpayer withdrew $29,000 from his TFSA that same day.
Under the Income Tax Act, the CRA has the power to waive or cancel the overcontribution tax if it can be established that the tax arose “as a consequence of a reasonable error” and the overcontribution is withdrawn from the TFSA “without delay.”
If there ever was a case of “reasonable error,” this sounds like just that case. Unfortunately, the Tax Court judge was unable to cancel the penalty tax as that can only be done at the CRA’s discretion.
The judge urged the CRA “to consider exercising [its] discretion” and cancel the penalty tax. Such cancellation, the judge wrote, “would find ample support on the extraordinary facts of this case.”
Jamie Golombek, CA, CPA, CFP, CLU, TEP is managing director, tax and estate planning, at CIBC Financial Planning and Advice in Toronto.