Missing a message from CRA doesn't let taxpayer off the hook in TFSA overcontribution case

National Post


It’s been at least a decade since I last received a paper bill in the mail. Hydro, gas, cable, home Internet and even my monthly credit card statements, are all delivered to me electronically, and then stored on a cloud somewhere, for immediate access. (After all, you never know when you’ll need to double-check that hydro bill from 2017.)

A few years ago, I also signed up for email notifications from the Canada Revenue Agency (CRA) that lets you know when you have mail to view in CRA’s My Account. The CRA also notifies registered taxpayers if certain changes are made to your account, such as if your mailing address or banking information for direct deposit has been changed, or even if your Personal Identification Number is created, updated, or deleted. Additionally, benefit applicants are notified by email if they’ve successfully applied for one of the many COVID-related benefits. Finally, the CRA also lets you know via email whether any physical mail sent to your home has been returned, signalling that you may need to update your snail mail address.

You can also receive a variety of CRA mail online, including notices of assessment (NOA) and reassessment, benefit notices, T1 adjustment notices and quarterly instalment reminders. Of course, if you ever need a paper copy of a piece of CRA mail, you can always log in to My Account and print a PDF version.

Last month’s federal budget proposed changes to the law that will allow the CRA to send some NOAs electronically, without the taxpayer having to authorize it explicitly to do so. The change will apply to individuals who file their income tax return electronically and to those who use the services of a professional tax preparer that electronically files their return. (Taxpayers who paper-file their tax returns will continue to receive a paper NOA.) According to the government, this new measure is intended to “improve the CRA’s ability to operate digitally, resulting in faster, more convenient and accurate service, while also enhancing security.”

But receiving notifications of important CRA notices via email alone, without a subsequent paper mail notification, could potentially pose a problem for some taxpayers who aren’t in the habit of regularly checking (and opening) their email. It could even lead to tax penalties, as a British Columbia taxpayer found out in the latest TFSA overcontribution case, decided last week.

As regular readers of this column will know, it’s important for investors to carefully track their own TFSA contribution room, lest you overcontribute and face a penalty tax equal to one per cent per month for each month you’re over the limit. If you accidentally overcontribute, you can request that the CRA waive or cancel the tax, which it has the power to do 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.” The CRA has interpreted “reasonable error” as something beyond the taxpayer’s control and “without delay” as within 30 days of being aware of the overcontribution.

But just because you ask for relief, doesn’t mean the CRA will necessarily grant it. If the CRA refuses your request for relief, you can take your case to Federal Court, asking a judge to review whether the CRA’s decision to deny relief was reasonable. That’s what happened recently when the Vancouver taxpayer went to court asking the judge to review whether the CRA’s refusal to cancel the penalty tax on excess TFSA contributions he made in 2018 was reasonable.

According to judge’s ruling, the taxpayer “as a matter of choice” did not have home internet service nor a cell phone, “as is his right.” He did, however, use a computer at the local library to check his personal emails. CRA email notifications went to an email account in his name that he says he never checked. He also did not go onto the CRA My Account site.

The taxpayer was a regular contributor to his TFSA and routinely overcontributed. In 2016, he made a large TFSA contribution which left him only $1,000 TFSA contribution room for 2017. Yet in March 2017, he proceeded to contribute $5,500 to his TFSA, which resulted in an overcontribution of $4,500 in 2017.

In June 2017, after he had made this overcontribution, there was an “education letter” deposited into his CRA My Account, warning him of the consequences of overcontributions. The taxpayer testified that he never saw this education letter. Because he had overcontributed by $4,500 in 2017, when 2018 rolled around with its annual TFSA dollar limit of $5,500, the taxpayer only had $1,000 of TFSA room available for 2018, which was confirmed in a notice he received in March 2018. Yet two months earlier, in January 2018, the taxpayer contributed a further $5,500 to his TFSA, followed by another $1,000 in March. As a result, he had overcontributed in 2018 to the tune of $5,500.

In July 2019, he received a NOA for his TFSA for the 2018 overcontribution. The taxpayer was required to pay taxes and interest on the excess contributions and late filing fees.

The taxpayer wrote to the CRA seeking relief, but was denied. In August 2019, he withdrew $5,500 from his TFSA. In October 2019, the taxpayer again requested the cancellation of taxes, penalties and interest, which was denied by the CRA on the basis that it was the taxpayer’s responsibility to be aware of TFSA rules, not to exceed annual contribution room, and to keep his contact information up-to-date. The CRA also found that he had not withdrawn his excess contribution within a “reasonable time” of first being notified by the CRA.

The judge found that the taxpayer did, indeed, make an error in his TFSA contribution limit, which was neither “induced (nor) contributed to by CRA.” The taxpayer acknowledged that the error was his, and that the CRA did not cause nor contribute to his error, which was made after the education letter was available online, but before the taxpayer had seen the letter.

The judge concluded that since the taxpayer “failed to establish reasonable error, the relief is not available even if he withdrew the excess contribution within 30 days of receiving CRA’s notice.” The judge therefore dismissed the taxpayer’s request for relief, effectively upholding the CRA’s decision not to waive the TFSA penalty tax and interest.

There are two lessons we can take from this case: know your TFSA limit and stay within it and, of course, always check your email.