Tax Tip Thursday

This week’s topic is moving your TFSA from one place to another, and why you should be careful doing it!

We will also touch on CRA tax payments towards the end.

Your Notice of Assessment & TFSA

When you get your notice of assessment (NOA), it does NOT include any information on your TFSA. Guess where the information is though? MyCRA! Yet another reason to have the account.

Each year, all TFSA issuers are required to electronically submit a TFSA record to the CRA for each individual who has a TFSA. Issuers must submit this information by the last day of February of the following year, and report all TFSA transactions you made on or before Dec. 31 of the prior year.

It’s important, however, to compare the TFSA transaction information the CRA has with your own records to ensure the information they have is correct and up to date. It is more than possible that when you look online, especially in the first few months of the year, the CRA may not yet have received and processed the previous year’s transactions, meaning they’re not yet reflected in the TFSA amounts shown online. This could lead to an overcontribution.

The penalty for overcontributing is equal to one per cent per month for each month you’re over your limit. If you get assessed a TFSA penalty tax, you can request the CRA to waive or cancel it, which the agency has the power to do if it can be established the tax arose “as a consequence of a reasonable error,” and the overcontribution is withdrawn from the TFSA “without delay.” If the CRA refuses to cancel the tax, you can take the matter to Federal Court, where a judge will determine whether the CRA’s decision not to waive the tax was “reasonable.”

Moving Your TFSA

The most recent decision involving a TFSA overcontribution, decided in April 2024, concerned a taxpayer who went about transferring his TFSA from one financial institution to another in the wrong way.

The taxpayer had at least two TFSA accounts. At the beginning of 2020, his unused TFSA room was $6,270. He contributed a total of $46,000 in 2020, and so he exceeded his limit by $39,730 and was consequently assessed a penalty tax.

The source of his overcontributions could be traced back to the taxpayer’s actions in early 2020. On Feb. 4, 2020, he withdrew $20,000 from his TFSA with “Bank A”, and deposited it the next day into his TFSA with “Bank B”.

He did the same thing again the following month, when on March 9, 2020, he withdrew another $20,000 from his Bank A TFSA, only to deposit it the next day into his Bank B TFSA. He had also deposited another $6,000 into his TFSA account in early 2020, so his total 2020 TFSA contributions were $46,000, but he only had $6,270 in unused room.

In July 2021, the taxpayer received a notice from the CRA advising him that he had exceeded his TFSA contribution limit in 2020, and telling him he had to pay $2,166 in penalty tax on his excess contributions for 2020.

In October 2021, the taxpayer sent a letter to the CRA requesting that it cancel the tax on his excess TFSA contributions. In March 2022, the CRA wrote to him denying his request, saying it could only do so if the contributions were made as a result of a “reasonable error,” and the individual immediately took steps to withdraw them from the TFSA, which was not the case here.

Following this refusal, the taxpayer filed a second application in April 2022 for the cancellation of the tax. In June 2022, the CRA again denied his request “because the transfers of funds made in 2020 from one TFSA account to another TFSA account were not ‘direct transfers’ since the transfers were not made by the financial institution.” The result was that these transfers were considered to be regular contributions, putting the taxpayer in an overcontribution situation.

The taxpayer appealed this decision to the Federal Court. He argued that “he (had) acted in good faith in transferring funds from one TFSA account to another.” But the CRA maintained that the taxpayer’s error in this case was not a “reasonable error” because he admitted he had not made his transfers in the manner prescribed by the CRA (by asking his financial institution to do so directly) since he was unaware of the obligation to do so. In the CRA’s view, its exercise of discretion to waive the penalty tax would not be appropriate in the circumstances.

The judge reviewed the arguments and then cited various prior cases dealing with similar scenarios in which it was held that it was up to the taxpayer to understand the TFSA rules, including how to property transfer funds “directly” from one TFSA to another.

What Should I Do?

You cannot transfer funds from one TFSA to another by withdrawing the money, then depositing it into the other. The CRA will NOT see this as a “transfer”, they will see it as you taking money out, then contributing again. If you want to move money from one TFSA to another, it must be done DIRECTLY by the financial institutions. If you do it yourself by withdrawing and then depositing the funds, the courts have consistently held that the CRA’s refusal to treat such errors as “reasonable errors” (which would allow the CRA to waive the tax), was, itself, reasonable, and you may have to pay a lot of taxes.

The judge ultimately expressed sympathy for the taxpayer, but said he was “bound by the jurisprudence and principles identified by my colleagues. My role is not to rule on the merits, but to assess whether the (CRA’s) decision is reasonable, determining whether it is intelligible, transparent and justified.” The judge concluded that it was, and dismissed the taxpayer’s case.

While the CRA sought costs, the judge refused to award the agency anything owing to the unfortunate circumstances of the case.

Note For Businesses

Last point on tax payments to the CRA. If you are a small business sole prop or corporation and you are making money (positive net income on a monthly basis), you need to be making payments to the CRA throughout the year. If you are not sure – either see an accountant or estimate your self. The same applies to HST.

These payments are not a suggestion! They are required! And they will save you a lot of grief at tax time. Corporate taxes for many are due march 31 although the return is not due until June 30. For sole props taxes owing are due April 30 although return not due to be filed until June 15.

You will be hard pressed to find an accountant to can get all their corporate tax returns completed by March 15, but if you have made all your instalments/tax payments through the year, it will not matter as they already have your money! This will save you a lot of grief and most importantly interest on your tax balances!

Need Help Transferring Funds?

While we are not a bank at The Mad Accountant, we can look at your financial situation and help you understand the CRA rules as they apply to you. We can give you advice on what we think you should do, and we can make sure that the path you take has the least amount of tax, keeping more of YOUR money in YOUR pocket. Book an appointment with us today!

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.