Taxman sends 76,000 warnings about tax-free savings accounts


OTTAWA – Tens of thousands of Canadians have again broken the rules for a popular tax shelter, triggering yet another volley of warning letters from the Canada Revenue Agency.

The agency has sent some 76,000 Canadians a mailout reminding them of the strict rules against overcontributions to tax-free savings accounts or TFSAs — and demanding they pay more tax.

The number of problem accounts identified is down from the 103,000 warnings sent out in August last year, but up from 72,000 the year before, suggesting the overcontribution problem is becoming chronic.

About 15,000 people who got warning letters this June also received similar letters last summer, indicating a slow learning curve for some taxpayers.

A spokesman for the agency notes the number of problem accounts is a tiny fraction of all the TFSA accounts opened by 8.2 million Canadians by the end of the 2011 tax year.

“The proportion of individuals who received a proposed return (i.e., a mailout warning) was less than one per cent of the total number of TFSA holders,” Philippe Brideau said in an email response to questions.

“This figure is significantly lower than the 1.5 per cent who received proposed TFSA returns in the previous contribution years. … While there are instances of misunderstanding, it is apparent that the vast majority of contributors understand the rules.”

Tax-free savings accounts, which became available on Jan. 1, 2009, allow Canadians to earn money on deposits inside the account without attracting any income tax, even when money is withdrawn. The current maximum annual contribution is $5,000.

But there is a poorly understood wrinkle in a rule governing the timing of deposits.

The rule says account holders can put back the amounts they withdraw from a TFSA only in a later calendar year. If they do so in the same calendar year, they face a tax hit for their “overcontribution,” even though they’re only replacing the withdrawn funds.

Canada’s banks and the tax agency itself highlighted the rule on websites and financial brochures once the widespread misunderstanding first became apparent in June 2010. But despite those efforts, tens of thousands of account-holders continue to fall afoul.

The agency says it will continue to be flexible for those Canadians with a “genuine” misunderstanding of the rules.

“In situations where a genuine misunderstanding of the rules has occurred and the overcontribution removed within a reasonable period of time, the tax may be waived,” Brideau said.

Of the 103,000 cases identified last year, 38,000 Canadians have sent in payments for the extra tax due on their overcontributions, while at least 22,500 asked for — and were given — waivers on the extra taxes. The waived amount averages $318.

In the previous year, 23,000 Canadian successfully requested waivers, for an average of $235 each.

Excess amounts are taxed at the rate of one per cent for each month there is an overcontribution.

A Harris-Decima poll commissioned by CIBC (TSX:CM) and released last month found 47 per cent of respondents had set up a TFSA, but only about half had actually made a deposit so far this year.

The savings vehicle was most popular among British Columbians, and least popular among Atlantic Canadians, the survey found.

The Canada Revenue Agency says more than $60 billion in assets is currently held inside TFSAs.

During the campaign leading to the May 2, 2011, federal election, Prime Minister Stephen Harper promised to double the annual TFSA contribution limit — to $10,000 — once the federal deficit is eliminated.

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Taxman sends 76,000 warnings about tax-free savings accounts

  1. I am willing to bet that most individuals are not intentionally overpaying into their TFSA. Last year I received a letter stating that I exceeded my contribution limit and although my actual balance never exceeded what my contribution limit was, I made the mistake of taking some money out and then later that year put some back in, not realizing that in doing so is considered “overcontribution”. So I paid my my minimal interest charges and then nearly emptied that account and put it into my checking account. I now no longer pay any bank fees because I have the minimum monthly balance in my checking account, and that is worth far more than than the few dollars in interest the TFSA earns me!

  2. No wonder so many mistakes. The TFSA is an idiotic vehicle attracting those who haven’t the good sense to figure that out. Unlike an RRSP, in which the principle remains tax free as long as it’s in the shelter, only tax on the interest generated remains tax free in a TFSA. So with a maxed out contribution of $5000 at a generous rate of 3% and assuming you are in the 50 percentile tax bracket you could save a whopping $75. Whoop-te-doo! Dinner out for a family of four if you take it easy. Gee, thanks Stephen Harper. That same $5000 put into an RRSP or education account could reduce you taxes by $2500 with the same assumptions in place. The TFSA isn’t worth the time it takes to set up the account. Start factoring in all the administrative costs required to warn taxpayers that they over contributed and owe the government an additional $3.65 and you begin to see how worthless it really is. So with It seems 8.2 million Canadians CAN be wrong.

    • Except the poor returns you mention is actually a fault of our monetary policy and banking system — not of the TFSA. If you use the TFSA as a normal savings account with a bank, you’re right it’s not that great and the bank is probably laughing. However if you setup your TFSA with a brokerage and happen to invest in Canadian miners during the 2009 lows, you’re laughing (and the tax savings could be huge). I think the TFSA is a great program because it requires taking some personal responsability.

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