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moneysense.ca, 27/06/10
Government Waives Some TFSA Penalties
The Government of Canada has decided to be “as flexible as possible” in cases where a genuine misunderstanding of TFSA contribution rules resulted in TFSA excess amount penalties. If you are one of the 70,000 or Canadians who have received a letter from the Canada Revenue Agency asking for further information about your TFSA account, you should be aware that there is no blanket waiver. You have to provide further information to the CRA about your TFSA account(s) by August 3, 2010 (the original June 30 deadline has been extended).
The Government is indicating that taxpayers whose net TFSA contributions never exceeded $5,000 can expect a penalty waiver. The excess TFSA amount penalties incurred by taxpayers who used their TFSA as a savings account and made frequent deposits and withdrawals and / or transferred their TFSA account from one bank to another by withdrawing from one and contributing to the other will be considered to be a result of reasonable error. It is not clear if taxpayers whose net TFSA contributions exceeded $5,000 are also deemed to have been genuinely confused about TFSA rules.
One wishes the financial institutions which were so eager to sign up as many TFSA accounts as possible had been a little more proactive in catching TFSA excess amount errors and warning clients that they might be running afoul of TFSA contribution rules. I wonder how many banks still have no warnings of any sort when a client tries to make a contribution to a TFSA account. When I opened an account with Ally Bank early this year, they refused to accept an initial contribution over $5,000. However, when I tried to contribute another $1.00 to my TFSA account, there were no warnings or cautions of any sort. Is it any wonder that so many Canadians have inadvertently “over contributed” to their TFSA accounts?
You can find the press release here.
moneysense.ca, 27/06/10
I accidentally tried to transfer money into my TFSA with ING over the $5000 limit. It displayed some sort of error message saying that I had over contributed. It was nice for them to have caught that since it was my mistake in selecting the wrong account.
@ING Client: Yes, I have a TFSA account with ING as well and it displays a warning message when contributing to the TFSA account. With all the brouhaha that the TFSA excess amount penalties have created, you’d think that financial institutions would rush to warn clients of being careful when contributing to the TFSA accounts but clearly some still can’t be bothered. A pity, really.
Does anyone know why withdrawals don’t just get added to your contribution room immediately? Is this a hangover from RRSPs, or is there some justifiable reason?
@Patrick: Here’s my guess on why withdrawals don’t get added to the contribution room in the same year. It’s an administrative nightmare to keep track of. Per current rules, all a financial institution has to do is report contributions and withdrawals for a tax payer once every year. To keep track of a balance, instead of contribution room, financial institutions have to report it immediately and CRA should keep a running tally because a taxpayer could withdraw from one account and contribute to another. It will all add up to a mountain of extra paperwork. Calculating excess TFSA amounts will depend on the sequence of contributions and withdrawals among all institutions, not just total contributions and total withdrawals from each institution separately.
Anyway, that’s my guess. I’ve been meaning to write a post on this and would like comments.
@Canadian Capitalist: Excellent point. Though, I suppose it could all be calculated after-the-fact from contributions and deductions reported at the end of the year.
[...] Government Waives Some TFSA Penalties @ Canadian Capitalist [...]
@Canadian Capitalist: I’m not sure if that’s the reason for limiting the re-contribution to the next year. CRA already, for the purposes of tax penalty calculation, tracks exactly how much aggregate overcontribution you have at any given time across all TFSA accounts you have. See form RC243-SCH-A. My guess is that they do it intentionally to limit the number of transactions so that people really think of it as a savings method.
What I find amusing is that I’m one of those 70000 Canadians who was assessed a penalty ($450!!) because my bank misreported a transfer from a savings account to brokerage account as a withdrawal and a contribution (on the same day!).
What I find amusing is that according to form RC243-SCH-A, if you withdraw an overcontribution, the day after the overcontribution, the withdrawal decreases the overcontribution, and you would only be charged a penalty for the overcontribution for 1 month, or 1% of the overcontribution.
However, if you withdraw and contribute on the same day (which is what CRA believes I did), then it is debatable which transaction occurred first (maybe the overcontribution was fresh money). Form RC243-SCH-A doesn’t say which to place first, but if the withdrawal happens second, then it reduces the overcontribution. If it happens first, then you have an overcontribution for every month for the rest of the year. Care to guess which of the two methods CRA picks by default?