Tax Tip Thursday

This week’s post & show is part 1 of a 2-part series, so check back in next week for the rest!

Today we discuss RRSPs and over-contributions. To begin, I’ll stress that ignorance of CRA regulations will NOT get you off the hook!

I am noticing in general, over the last couple of years, people have been taking advantage of the Registered plans available to them to save money. Specifically, TFSAs, FHSAs, and RRSPs. There are many others, but those are the big 3 that everyone is aware of and use consistently.

The TFSA cumulative Life to date limit is potentially $95,000 which includes this year’s annual dollar limit set at $7,000.

You can check your TFSA contribution limit online by logging into your MYCRA account, but keep in mind your TFSA contribution and withdrawal information is not updated in real-time and may be out of date. Check the “as of” date posted online alongside your TFSA room. This last statement is very important!

What if I Over Contribute?

You do NOT want to do this!

There is a penalty of 1% PER MONTH for each month you are over your limit. A one percent tax doesn’t seem like a lot, but the tax is one percent per month for each month you’re over the limit until the overcontribution is withdrawn — that’s 12 percent per year.
If you do get hit with 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to do if it can be established the tax arose “as a consequence of a reasonable error,” and the overcontribution is withdrawn from the TFSA “without delay.”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.”

Story Time

I find the most impactful way to get people to pay attention is to tell some real-life stories.

Recently a taxpayer who was assessed nearly $11,000 in penalty taxes, plus a late-filing penalty and arrears interest, tried to get the penalties reversed, to no avail. The taxpayer first opened a TFSA account in 2010, but only really started to “use it” in 2020. As of Jan. 1, 2020, the taxpayer’s TFSA contribution limit was approximately $70k. During 2020, she contributed almost $400k. She also made withdrawals totaling almost $300k. As a result, given her limit of $7k at the beginning of 2020, she had overcontributed by $30k by the end of the year.

The CRA in July 2021 issued the taxpayer a TFSA Notice of Assessment (NOA) for the 2020 taxation year indicating she owed $10,815 in penalty tax based on her excess contributions to her TFSA for 2020, plus a late-filing penalty charge and arrears interest.
The taxpayer in January 2022 formally requested the CRA cancel the tax assessed on her excess TFSA contributions, noting that she “did not have sufficient information regarding the rules governing the use of TFSAs, and that she thought that a TFSA operated in the same manner as a regular savings account.”

The CRA denied the taxpayer’s initial request for relief, noting that a “lack of knowledge of taxation rules cannot be considered beyond a taxpayer’s control as information is readily available on (the CRA’s) website and through (its) general inquiries telephone line.” The CRA officer further noted “It is the responsibility of the taxpayer to be aware of the rules governing the administration of their TFSA,” and pointed out the taxpayer had held the TFSA for more than a decade before the overcontribution in 2020 occurred. The CRA in July 2022 sent the taxpayer a second TFSA NOA, this time for the 2021 taxation year, notifying her she now owed $14,748 in connection with her remaining excess TFSA contributions from 2020, some of which remained unwithdrawn in 2021, plus additional interest and penalties.

Fast forward to February 2023 when her case was reviewed by a second CRA officer, who again denied the taxpayer’s request to cancel the penalty tax, citing several reasons. The first was that the taxpayer had held her TFSA since 2010 and should have been familiarized with the rules. In addition, her lack of knowledge of the rules cannot be considered as something “beyond her control” because such information and resources are widely available. The officer also noted the taxpayer was advised of the overcontribution in July of 2021, but only took steps to withdraw the excess amounts in 2022. This was not, in the view of the CRA, “within a reasonable time frame.” After being denied relief for the second time, the taxpayer appealed to the Federal Court seeking a judicial review of the CRA’s decision not to forgive the penalty tax. In these cases, the court’s role is to determine whether the CRA officer’s decision was reasonable.

In this case, the judge concluded it was. “A taxpayer’s lack of knowledge or misunderstanding does not render a CRA’s discretionary decision to not grant tax relief … (to be) unreasonable,” she said.

Lessons to Learn

So, there are a few things to learn:

1. Make sure you know your limit – if you have an investment advisor and all your investments are in ONE place, they can provide you with that information if it is not on your statements already.
2. DO NOT over-contribute for any reason – there is no benefit – only downside
3. If you get a bill from the CRA, I almost always recommend that you pay it (or at least get professional advice to help you determine whether you should or not).
4. If she paid the original bill, she would have saved herself thousands of dollars!

Are you finding yourself in a similar situation? Or maybe you’re just wondering how to make sure you avoid in this kind of predicament? Either way, book an appointment with us today and we can help you out.

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.