Ask questions before opening TFSAs

Clients who overcontribute to TFSAs may pin the blame for that error on you.

I spoke with one GTA-based advisor whose client put in an extra $5,000. CRA dinged her $550, and she asked him to pay the penalty.

Turns out, she forgot about a pre-launch contribution made in 2008 just after the program – which formally began in 2009 – was announced by the government. And the advisor didn’t start administering her accounts until 2010.

Read: Educate clients about TFSA stipulations

But these mistakes can still happen. Here’s how.

At least one bank still offers a forward-contribution option starting each October. It works like this: contribute before year’s end, and you’ll earn additional bank interest until December 31. On January 1, the money’s automatically transferred to into an actual TFSA account.

Good for interest earning; not good for record keeping.

The lesson: Clients can forget about low-dollar-figure contributions to accounts such as TFSAs. And, if they hold them with multiple institutions or advisors, they’re less likely to tell you about all of them.

Read: Ask clients to consolidate

In part, that’s because CRA doesn’t provide updates to taxpayers detailing their remaining contribution room. And when it does track inputs, the reporting’s prone to errors. I logged into CRA’s “My Account” function, and my 2011 contributions don’t appear; the site says I have $5,000 of room to play with. I don’t.

One would think that if CRA is going to assess penalties, it could at least put accurate TFSA information on its notices of assessment.

Read: Thousands break TFSA tax rules

Until that happens, and it may never, make sure you ask clients:

• Do you already have a TFSA?
• Do you have more than one?
• If so, how much is in each?

As for that $550 penalty? The client’s backed off from the advisor and is going to appeal directly to the CRA’s good graces.

But some of you may not be so lucky.

Melissa Shin

Melissa is the editorial director of Advisor.ca and leads Newcom Media Inc.’s group of financial publications. She has been with the team since 2011 and been recognized by PMAC and CFA Society Toronto for her reporting. Reach her at mshin@newcom.ca. You may also call or text 416-847-8038 to provide a confidential tip.