No one likes receiving unexpected notices from the Canada Revenue Agency (CRA). Some owners of tax-free savings accounts may have received notices and may be confused about the rules governing such accounts.
Effective since January 1, 2009, Canadians over 18 have been able to contribute up to $5,000 a year to tax-free savings accounts (TFSA). They do not obtain a tax deduction for contributions, but any investment income or capital gains earned in a TFSA is not taxed. Withdrawals from the accounts are also tax-free and can generally be withdrawn at any time.
Confusion has arisen, however, over whether withdrawals can be replaced in a TFSA within the same tax reporting year. They cannot, if such deposits take the contribution total over the $5,000 limit.
As an example, if a TFSA owner has deposited the maximum of $5,000, then withdraws $2,000 – or even transfers it into another bank account – then deposits $2,000 later in the year to top up the account, CRA deems that $7,000 has been deposited in the TFSA. There is a penalty for excess contributions amounting to one per cent of the excess, assessed each month within the taxation year. Some account owners have unexpectedly received notice of penalty assessments.
Many people were unaware of this aspect of the rules governing TFSA contributions. You have to wait until the following taxation year to replenish a TFSA if the replenishment will mean that your total deposits exceed $5,000.
The CRA has acknowledged that there has been genuine misunderstanding about the rules and is willing to reconsider the penalties in such cases. If you have received reassessment notices concerning TFSA contributions, Lipton understands the CRA’s procedures for seeking a review of penalties and have already made representations on behalf of clients.
Jeff Nightingale is the Senior Tax Partner at Lipton LLP, Chartered Accountants. Jeff has written a number of publications and speaks to a variety of professional and business groups, including the Canadian Tax Foundation, the Institute of Chartered Accountants of Ontario and The Law Scociety of Upper Canada. He has also completed the CICA In-Depth Tax Course as well as other advanced taxation courses and is a member of the Canadian Tax Foundation and the Society of Trust and Estate Practitioners.