Canadian residents can contribute an additional $6,000 to their tax-free savings account (TFSA) in 2021. And, for those who have never opened up a TFSA, who were at least 18 years old in 2009, and have been a resident of Canada throughout those years, your cumulative contribution limit will be $75,500.
The requirement to be a resident of Canada is important, because only Canadian residents are permitted to contribute to a TFSA, and only a resident can accumulate the annual TFSA contribution room. There is a penalty tax of one per cent per month if a non-resident contributes to their TFSA, in addition to the normal overcontribution tax of one per cent per month for each month your TFSA is in an overcontribution position.
Fortunately, the Canada Revenue Agency has the power to waive or cancel the penalty tax if it can be established that the tax arose “as a consequence of a reasonable error” and the overcontribution is withdrawn from the TFSA “without delay.”
To request a waiver of the penalty tax, a taxpayer needs to forward a detailed written request to the TFSA Processing Unit with all relevant information to explain “why it would be fair to cancel or waive all or part of the tax.” But just because you ask for relief, doesn’t mean the CRA will grant it. If the CRA refuses your request for relief, you can take your case to the Federal Court of Canada to ask a judge to review whether the CRA’s decision to deny relief was reasonable.
In a recent column, I reviewed a case in which a taxpayer was charged an overcontribution penalty tax because his bank told him he could replace $20,000 lost on an investment in his TFSA — advice that turned out to be incorrect. After the CRA refused to cancel his overcontribution tax, he appealed the decision to the Federal Court, but lost.
Another TFSA case has found its way to court, this time involving a non-resident who was given incorrect advice at her bank about whether she could contribute to her TFSA.
In 2009, the taxpayer contributed to her TFSA as a Canadian resident. In June 2010, the CRA informed her, by letter, that she had made an excess contribution to her TFSA and assessed her an overcontribution tax of $33.81, which the taxpayer immediately paid and considered the matter closed.The taxpayer emigrated from Canada in 2010 and lived in a number of places before moving to New York, where she works as a school teacher. Unaware that she was ineligible to contribute to her TFSA as a non-resident, the taxpayer contributed small amounts to her TFSA each year between 2010 and 2018, except 2014, when she contributed a little more than $30,000 “in order to save for her retirement.”
Before making the 2014 contribution, the taxpayer consulted her Canadian bank representative to ensure that she was eligible to contribute. The taxpayer said she was no longer a Canadian resident and the representative, after consulting with his bank manager, advised her that she could, indeed, contribute to her TFSA.
Fast forward to July 2018, when the taxpayer discovered that she had been given her incorrect advice. Consequently, the taxpayer promptly emptied and closed her TFSA account. She then called the CRA and was advised to submit a letter requesting a waiver of any penalty tax.
The taxpayer sent a letter to the TFSA Processing Centre in Winnipeg, requesting the CRA waive liability on her excess and non-resident TFSA contributions for the 2010 to 2018 taxation years on the basis that the liability arose as a consequence of a reasonable error. She explained that she “had been unaware that she could not contribute to her TFSA as a non-resident, and that she had been incorrectly advised by her bank representative that she could contribute as a non-resident.”
Her initial request was denied and her “reward” for coming forward was a CRA assessment totalling $27,641 in tax, penalties and interest for her excess and non-resident TFSA contributions, effectively wiping out her retirement savings. The taxpayer then requested a second, independent review by the CRA of her request for a waiver, which was also denied on the basis that she “continued to make excess and non-resident contributions to her TFSA after she was notified that she had over-contributed in 2009.”
As the harshly worded CRA letter stated, “(T)here are no circumstances that would support the cancellation of the tax on excess and non-resident TFSA contributions. It is the individual’s responsibility to educate themselves about the TFSA rules after being notified.”
The taxpayer appealed the CRA’s second-level decision to the Federal Court and the case was heard in August, via teleconference, by a judge sitting in Toronto, and the taxpayer being represented by Dentons Canada LLP in Edmonton, where she used to live.
In court, the taxpayer argued that the CRA’s decision was “unreasonable” because she was a Canadian resident in 2009, and she, therefore, did not “repeat the same mistake” when she contributed to her TFSA as a non-resident after 2009. Therefore, she believed that the CRA’s decision was not justified by its reasons.
Fortunately for the taxpayer, the judge agreed. Discretionary decisions by the CRA refusing to waive taxes and penalties are reviewed on the “reasonableness standard.” In addition, a reviewing court must determine whether the decision bears the “hallmarks of reasonableness: justification, transparency and intelligibility.”
The judge, who released her decision in mid-December, felt that it was “unreasonable for the (CRA) to suggest that (the taxpayer) continued to make excess contributions after being warned. The (CRA) failed to recognize that (the taxpayer’s) excess contribution in 2009 and her subsequent excess contributions resulted from different errors.”
The judge concluded that the CRA’s decision to deny relief from tax liability arising from the taxpayer’s excess and non-resident TFSA contributions was unreasonable, since it lacked the requisite transparency, intelligibility and justification.