TFSA overcontributions still a problem

This article appears in the November 2022 issue of Advisor’s Edge magazine — our second last print issue. If you’re a print-only subscriber, learn more about our digital transition and how to continue to receive all the best news and features on Advisor.ca.

While the TFSA has been around for more than a decade, it’s still surprising how frequently clients get caught up in the overcontribution rules.

Take the recent case (Zazula v Canada, 2022 FC 1156) in which an 83-year-old, self-represented Saskatchewan taxpayer took the Canada Revenue Agency (CRA) to court over his TFSA overcontributions.

Before delving into the case’s facts, let’s review the overcontribution rules and what happens if a client accidentally overcontributes.

The TFSA limit for 2022 is $6,000. Depending on an individual’s age, however, the limit could be as high as $81,500 if they’ve never made a TFSA contribution, since unused room automatically carries forward. An individual can also recontribute TFSA withdrawals beginning in the calendar year following the year of withdrawal.

If a taxpayer accidentally overcontributes to their TFSA, they can get hit with a penalty tax of 1% of the overcontributed amount per month for each month they’re over their limit. A client can ask the CRA to waive or cancel the penalty. The CRA’s power to do so in such cases requires the taxpayer to establish that the overcontribution arose “as a consequence of a reasonable error” and the withdrawal of the extra amount from the TFSA was done “without delay.”

If the CRA refuses to cancel the tax, the client can take the matter to Federal Court, where a judge determines whether the CRA’s decision was reasonable. That’s what a taxpayer did in this most recent case.

The taxpayer admitted that he unknowingly overcontributed to his TFSA during 2016 and 2017. On Jan. 1, 2016, the taxpayer had TFSA contribution room of approximately $27,500. He contributed $46,500 that year, exceeding his contribution room by $19,000.

As of Jan. 1, 2017, when that year’s limit of $5,500 kicked in, the taxpayer had exceeded his contribution room by $13,500. Consequently, in July 2017, the CRA issued a notice of assessment in respect of his overcontribution in the 2016 taxation year, charging him the penalty tax.

The taxpayer did not withdraw the overcontributed amount. With the 2018 TFSA limit set at $5,500, that meant he had exceeded his contribution room by $8,000 as of Jan. 1, 2018. The CRA issued a second notice of assessment that July, this time for the 2017 taxation year, again charging the overcontribution penalty tax.

In September 2018, the CRA’s TFSA processing unit recommended in a letter that the taxpayer withdraw the excess contributions from his TFSA as soon as possible to halt the monthly 1% penalty tax. The taxpayer withdrew $9,000 from his TFSA on Oct. 1, 2018.

A week later, the taxpayer submitted a request for relief for his TFSA overcontribution penalty.

He claimed he wasn’t responsible for the overcontribution, as he was not informed by his bank, or by the CRA, that he was overcontributing. He also claimed he was unaware that withdrawals he made from his TFSA are only added to his contribution room the following calendar year.

In January 2019, the CRA denied his request. The taxpayer asked for a second-level review, which was denied in June 2019. In denying the second request, the CRA officer noted that the taxpayer didn’t remove the excess contributions from his TFSA for 2016 and 2017 until Oct. 1, 2018, which was not fast enough.

The taxpayer then turned to the Federal Court, asking it to review whether the CRA’s decision was reasonable. In court, the taxpayer’s primary argument was that the CRA failed “to administer the income tax system fairly and reasonably.”

He explained that he did not withdraw his excess TFSA contributions immediately as he was waiting for responses from the CRA to his questions. He also felt that the CRA has “a duty of care to have a system that does not allow overcontribution.”

The judge was not convinced, finding that the CRA reasonably responded to the taxpayer’s questions. She concluded that the CRA officer’s decision to deny penalty tax relief was reasonable. “Although [the taxpayer] was notified of his overcontributions, he did not act without delay to remove the excess contributions from his TFSA,” the judge stated.

The ruling is another important warning from the court that clients need to be vigilant about keeping within their TFSA contribution limit. Clients need to track contributions to registered accounts elsewhere when calculating contribution limits to avoid surprises.

Jamie Golombek, CA, CPA, CFP, CLU, TEP is managing director, tax and estate planning, at CIBC Private Wealth in Toronto

Jamie Golombek

Tax & Estate

Managing Director, Tax and Estate Planning, CIBC Private Wealth Team Jamie Golombek is Managing Director, Tax and Estate Planning with CIBC in Toronto. As a member of the CIBC Private Wealth team, Jamie works closely with advisors from across CIBC to support their clients and deliver integrated financial planning and strong advisory solutions. He joined the firm in 2008 after 12 years with a global investment company, where he was involved in both internal and external consulting on all areas of taxation and estate planning. Jamie has also worked for Deloitte as a tax specialist in the Toronto office, where he specialized in both personal and corporate tax planning. Jamie is quoted frequently in the national media as an expert on taxation. He writes a weekly column called “Tax Expert,” in the National Post, has appeared as a guest on BNN, CTV News, and The National, and for several years was a regular personal finance guest on The Marilyn Denis Show. He received his B.Com. from McGill University, earned his CPA designation in Ontario and qualified as a US CPA in Illinois. He has also obtained his Certified Financial Planning (CFP) and Chartered Life Underwriting (CLU) designations. In 2023, Jamie was named a CPA Ontario Fellow. The FCPA is the highest distinction that can be bestowed upon a CPA who brings distinction to themselves and to their profession through leadership and achievement in their professional, community or personal lives. Jamie is a past chair of the Investment Funds Institute of Canada’s Tax Working Group. He is also a member of CPA Ontario, the Illinois CPA Society, the Estate Planning Council of Toronto, the Canadian Tax Foundation and the Society of Trust and Estate Practitioners. For nearly two decades, Jamie taught an MBA course in Personal Finance at the Schulich School of Business at York University in Toronto.