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One of many best methods to remain on prime of your tax-free financial savings account (TFSA) contribution restrict and keep away from an overcontribution penalty is to double-check your restrict on-line, which could be simply carried out by logging on to Canada Income Company’s on-line portal for people referred to as My Account.

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There are a pair issues to bear in mind. First, know that your TFSA contribution and withdrawal info will not be up to date in actual time and could also be outdated. Test the “as of” date posted on-line alongside along with your TFSA room.

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Second, pay shut consideration to the quantity proven on the display screen, particularly if the quantity is in brackets, which means you may have a “unfavorable contribution restrict,” which may occur in case you have overcontributed in a previous calendar yr. A case determined earlier in June concerned a taxpayer who claimed to be confused by this bracketed quantity, ran afoul of his TFSA restrict and went to courtroom to get a choose to order the CRA to rethink his case.

Earlier than delving into the case, let’s briefly evaluation the principles. You may contribute $6,500 to your TFSA for 2023, and, relying in your age, your restrict could possibly be as excessive as $88,000 for those who’ve by no means made a TFSA contribution earlier than and you’ve got been a resident of Canada since 2009, since unused room routinely carries ahead from one calendar yr to the following. You can too recontribute any TFSA withdrawals again into your TFSA, starting the calendar yr following the yr of withdrawal.

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When you by accident contribute to your TFSA past your most, you’ll be able to get hit with an overcontribution penalty tax that is the same as one per cent per 30 days for every month you’re over your restrict. When you get assessed this tax, you’ll be able to ask the CRA to waive or cancel it, which it has the facility to do if it may be established the tax arose “as a consequence of an affordable error” and the overcontribution is withdrawn from the TFSA “at once.” If the CRA refuses to cancel the tax, you’ll be able to take the matter to federal courtroom, the place a choose will decide whether or not the CRA’s choice to not waive the tax was cheap.

On this latest case, the taxpayer started contributing to his TFSA in 2014. He overcontributed in 2015 and, in consequence, the CRA in Could 2016 despatched him an “training letter” notifying him of his overcontribution, and telling him to withdraw the surplus contribution “instantly” to keep away from the penalty tax.

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Quick ahead to 2021 when the taxpayer as soon as once more overcontributed to his TFSA. In July 2022, the CRA notified him of his overcontribution by the use of a Discover of Evaluation, charging him with an overcontribution tax of $2,570.60, plus a penalty of $128.53, together with arrears curiosity.

The taxpayer subsequently requested to have the tax and penalties cancelled. The taxpayer defined he had consulted his profile on the CRA’s web site, which recognized his TFSA contribution room as “($18,459.99).” The taxpayer defined he interpreted this info to imply he had $18,459.99 in out there TFSA contribution room, “not realizing that the brackets round that determine indicated that he really had a unfavorable contribution restrict, on account of earlier overcontribution.” He informed the CRA agent he was taking steps to take away the surplus quantity.

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In August 2022, the CRA denied his first request to cancel the tax, explaining that his circumstances “didn’t represent an affordable error.” The CRA stated the taxpayer had already obtained an training letter in 2016 as a consequence of a earlier TFSA overcontribution, and it was the taxpayer’s duty to withdraw any extra contributions and “to maintain and evaluation correct data to make sure” he stays inside his TFSA contribution room.

The next month, the taxpayer requested a second impartial evaluation by a special CRA officer. In his letter to the CRA, he stated he shouldn’t be blamed for his overcontribution as he “was not conscious {that a} contribution restrict displayed in brackets signifies a unfavorable quantity (i.e., an extra) and that, upon studying of his overcontribution, he promptly eliminated the surplus quantity from his TFSA account.”

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The taxpayer additionally stated that when he referred to as the CRA to resolve the difficulty, the CRA agent admitted that nowhere within the TFSA contribution room part does it state {that a} worth in brackets means a unfavorable quantity. He additionally stated he couldn’t recall his 2015 TFSA overcontribution, saying “it should have been a mistake, as a result of he’s an trustworthy taxpayer.”

The CRA once more denied the taxpayer’s request, so the taxpayer took the matter to Federal Courtroom to ask a choose to find out whether or not the CRA officer’s refusal to train their discretion and cancel the overcontribution tax was “cheap.”

The CRA officer acknowledged the taxpayer’s request for aid resulted from him not understanding the which means of the brackets across the quantity proven on the CRA web site. Nonetheless, the officer famous “it’s the duty of every TFSA account holder to pay attention to the principles and rules governing TFSAs and to handle their TFSA accordingly, together with understanding that using brackets represents unfavorable contribution room.”

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The choose had little doubt that the taxpayer was performing actually and his overcontribution was based mostly on a “real misunderstanding” as to how a lot TFSA contribution room he had. However, in the end, a taxpayer’s contribution room, and whether or not they’re in an overcontribution place, is a perform of contributions and withdrawals made by that taxpayer. It’s not depending on whether or not a taxpayer understands the data on a web site.

Because the taxpayer’s contribution info is “throughout the information, or the means of information, of the taxpayer,” the choose concluded the CRA’s reasoning in denying the taxpayer’s request for aid was “intelligible” and cheap, and dismissed the taxpayer’s software for judicial evaluation.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Property Planning with CIBC Personal Wealth in Toronto. Jamie.Golombek@cibc.com.

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