Some Canadians still slow to learn rules of tax-free savings accounts

OTTAWA – Thousands of Canadians received mailed warnings from the taxman this spring about overcontributions to their tax-free savings accounts, suggesting the rules remain unclear four years after the savings vehicles were first introduced.

The Canada Revenue Agency recently sent 65,978 mailouts to taxpayers who apparently put too much money into their TFSAs in 2012.

The number is down from the 76,000 who got mailouts last year, but remains stubbornly high despite efforts by the agency and financial institutions to alert Canadians to a wrinkle in the rules.

Tax regulations say that account holders can put back the amounts they withdraw from a TFSA only in a later calendar year. Doing so in the same calendar year exposes them to a tax hit for overcontributions, even though they’re only replacing the withdrawn funds.

The agency has been sending out warnings for four years now, with a peak of 103,000 in 2010. The CRA, banks and other financial institutions have stepped up education campaigns about the wrinkle, with uneven results.

Some 13,000 individuals who received TFSA overcontribution warnings this spring got the same mailout in the spring of 2012 for the previous taxation year, suggesting a steep learning curve for some people.

The agency’s Philippe Brideau says the number of Canadians receiving this year’s warning is only a tiny fraction of the nine million people who have opened TFSA accounts.

“In this contribution year, the proportion of individuals with excess contributions was less than one per cent of the total number of TFSA holders,” he said in an email. “That is slightly less than the previous year.”

Tax-free savings accounts, which became available on Jan. 1, 2009, allow Canadians to earn money on deposits and investments inside the account without attracting any income tax, even when the money is withdrawn.

The current maximum annual contribution is $5,500, though Prime Minister Stephen Harper has promised to double the maximum once the federal books are balanced.

The agency in the past has accommodated many Canadians who fell afoul of the overcontribution rules by waiving the penalty, and Brideau says this year is no different.

“If an individual would like their overcontribution situation reviewed by the CRA, they can write a letter to the CRA and provide additional information or an explanation in regards to their overcontribution,” he said.

“Each request will be reviewed on a case-by-case basis.”

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

As of the middle of last month, the agency had waived taxes on TFSA overcontributions for the 2011 taxation year for more than 19,000 people. The average amount waived was $503.

For the 2010 taxation year, the average waived was $318 for some 22,500 people.

Brideau also says about 28,000 people simply sent in a cheque to pay the penalty tax on their 2011 TFSA overcontributions.

An analysis last year by the Finance Department says the average withdrawal from a TFSA in 2011 was $986, more than double the amount in 2009.

As of 2011, 8.2 million people had TFSAs with an average value of $7,525 or a total of $62 billion.

The number of account holders tends to increase by income and age, says the Finance Department study.