Since the inception of the Tax-Free Savings Account (TFSA) in 2008, taxpayers have complained to the Canada Revenue Agency (CRA) that the rules regarding withdrawals and over-contributions are simply too confusing. For this reason, the CRA has confirmed it will once again be “as flexible as possible” for the 2010 filing year. This means the CRA will be more flexible when assessing penalty taxes where a taxpayer has made a mistake as a result of genuinely misunderstanding the TFSA contribution rules.
If you have a TFSA, and have received a letter from the CRA indicating you may have over-contributed, you are in a position to ask the agency to review your file. Under the right conditions, the agency may waive taxes on excess contributions for 2010, if there has been a misunderstanding.
As a reminder, the rules governing TFSAs state that individuals may contribute a maximum of $5,000 per year and take the money out any time, tax-free. Also, individuals can put the money back in, but only up to the limit of $5,000 for any given year.
The CRA’s promise to compromise is partially in response to taxpayer concerns that arose in 2009, plus any associated recommendations made as a result by the Canadian Taxpayers' Ombudsman. A recent report by Canadian Taxpayers' Ombudsman J. Paul Dubé — “Knowing the Rules” — recommends that the CRA more clearly communicate its rules on TFSAs. According to media reports and direct complaints, many taxpayers found the rules on withdrawals and over-contributions very confusing. There were additional concerns regarding the accessibility of information on TFSAs. As a result, thousands of Canadians inadvertently exceeded the limit of $5,000 in annual contributions in 2009, and they were taxed accordingly.
In an attempt to resolve this confusion, Dubé advised the CRA to take steps to engage Canadians to make them more aware of the information it provides about the TFSAs on its website, in print, and elsewhere. He also recommended the CRA continue to update the information available on the TFSAs and to be proactive in informing Canadians about how to find all tax rules governing these savings accounts. In addition, Dubé urged the agency to continue working with the financial services sector to ensure that its information products about the TFSA are widely available. The Ombudsman believes that improved communication will help minimize confusion and reduce disputes in the future. There is now a dedicated website for TFSAs: http://www.tfsa.gc.ca/
Last year, if you received a proposed TFSA return for 2009 you had until August 3, 2010 to respond. This year, if you receive a proposed TFSA return package from the CRA for the 2010 tax year, you have 60 days to respond with additional information, and/or a request that any penalty tax be waived.
As always, if you need any further advice on your TFSA, please contact me directly at: .(JavaScript must be enabled to view this email address)
