My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a tax partner and the managing partner of Cunningham LLP in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog do not reflect the position of Cunningham LLP. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Monday, June 3, 2013

Hot off the Press - 2012 TFSA Penalty Statements are Arriving at a Mailbox Near You

The CRA has started issuing penalty statements for excess TFSA contributions made during 2012. Canadians who have over-contributed to their TFSA are subject to a penalty of 1% per month on the excess contribution.

The covering letter, detailed excess amount calculations, TFSA transaction summary for 2012 and the RC243-P-E(13)X forms can total seven or more pages and are chock full of calculations and numbers. In many cases, the format of the penalty calculation is causing the recipients of the forms confusion and anxiety. The reason for this stress is as follows:

If someone over-contributed say $5,000 for all of 2012, you would think the CRA would multiply $5,000 x 12 (the number of months of over-contribution) x 1% a month penalty to come to the $600 penalty. However, the CRA statements run a cumulative contribution total such that the final over-contribution number at the bottom of the page is $60,000. Even though the CRA then just multiplies the $60,000 grand total by 1% to come to the correct $600 total, people are freaked out that they somehow over-contributed by $60,000.

Excess TFSA contributions and the related penalties have been thoroughly discussed by many newspaper journalists and bloggers over the past few years. I also covered this topic in my blog post “Canadians Continue to Break TFSA Rules” but I took a slightly different tack in that I postulated that if institutions offering TFSAs were required to ask the two questions below, most over-contributions would be prevented. 

Those questions were: 

1. Have you confirmed your yearly TFSA contribution room with your income tax assessment or with the CRA through your online account or any other means?

2. Does your contribution include an amount designed to replace funds withdrawn during the current calendar year? If so, do you understand that those funds cannot be replaced until next year unless you have other contribution room or you will be subject to penalties for over-contribution?

For the do it yourself (“DIY”) investor, you may have to ask and answer both these questions yourself if you have self-directed online accounts. However, what if you use an investment advisor or make your TFSA contribution at your local bank?

For the non-DIY investor, these may be loaded questions. For example, last year, a client over-contributed to their TFSA because their investment advisor suggested they catch-up on their TFSA contributions. The advisor thought or understood that their client had not made a TFSA contribution as of December, 2012 (some people felt the TFSA contribution limits were too small initially to worry about and only started catching up last year or currently), but a contribution had been made in 2009, the first year for TFSAs. I would hazard a guess that when the client went to the bank in 2009, their teller told them about this great new tax-free program and they setup an account with the bank they forgot about.

The issue that arises is whose fault is the over-contribution. The client or the advisor? Most advisors would probably suggest it is the client’s responsibility; and as with RRSPs, the client should know their limit, go online or check with their accountant to determine their available TFSA contribution room. The client, on the other hand, thinks their advisor should have been clearer about what they needed to do to confirm their TFSA limit.

Personally, in these types of cases, I think the over-contribution is both parties’ fault. Some people do not convey the proper information to their advisors, but their advisors, especially those with less sophisticated clients, need to ask “Have you confirmed your yearly TFSA contribution room to your income tax assessment or with the CRA through your online account?” and if not, can you please confirm such with your accountant. More importantly, even if the advisors think they did nothing wrong, they have inadvertently upset a client because of the penalty fees.

Whether you self-direct your TFSA or have an investment advisor manage the account, you need to be vigilant about confirming your TFSA balance with the CRA. Advisors need to realize something as innocuous as a TFSA contribution can sour a relationship with a client and they need to be diligent in ensuring their clients do not over-contribute and face penalties.

The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

14 comments:

  1. I don't know how most people make TFSA contributions, but mine can be made on-line, without talking to anyone.

    And CRA doesn't have an accurate number for my TFSA contributions, either (they seem to have missed an entire year).

    Every time parliament makes the tax legislation more complicated, more and more people are finding they cannot manage their own affairs without professional advice. Most of us should be able to make these decisions and keep tax records ourselves.

    I don't even know why we have to wait until the next fiscal year to re-deposit withdrawals from the TFSA - this seems completely arbitrary.

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    1. Hey Anon

      I agree, should be a simple process. U should contact the CRA to straighten out your TFSA balance owing.

      The year wait has caused significant issues, so I agree with you, even if just from an efficency perspective.

      Delete
  2. Mark, you must have some great clients if someone tells them they accidentally put an extra $60,000 in their TFSA last year and their first thought is that it's probably true!

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    1. VI, to afford me, you need that kind of money :)

      Delete
  3. Financial writers are partly to blame too. I keep reading how "if you haven't contributed yet, you can contribute $25,500 to your TFSA." That's only true if you were 18 when TFSAs began. Writers "assume" their readers are older or know that restriction, but they shouldn't really "assume" anything. What if a rich parent is prepared to dump money into a TFSA for their youngster who at 20 finally did something they approve of? What if a 19 year old inherits a lot of money and sensibly decides to top up their TFSA?

    You're right that by asking a couple of simple questions BEFORE putting money into a TFSA some of these headaches could be avoided.

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    Replies
    1. Hi Bet, good point, although most young people dont have TFSA's, they are too busy paying off student debt:(

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  4. Anxiety? Confusion? The in/out rules are ingenious. On January 1st you have a maximum contribution limit for the year. If you take money out, it adds to next year's contribution room but doesn't change the current year input limit.
    Do not trust your money to any financial advisor who cannot articulate this clearly.
    The gov't restricts re-deposits to the "next" year to block nefarious dealing.

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    1. Anon, I still see no point in delaying a year to re-contribute.

      Delete
  5. And then there are those canadians who are new to the country who can only contribute one year worth of TFSAs...would that be 5000.00 (from the initial year) or 5500.00. Even as an advisor I wouldn't know.

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    1. Anon,

      Good point, but the advisor should ask "have you checked your TFSA limit with the CRA", then your situation would be moot

      Delete
  6. Hi Mark,
    The post discusses penalties for over-contributions.

    However, do you know what the penalty is for holding non-qualified investments in your TFSA? Perhaps the penalty would be 1% of the market value of these non-qualified investments. It's hard to interpret the CRA bulletins.

    I was wondering, because it appears that an individual in the recent 'Financial Post' story, did just that.
    http://www.avrexmoney.com/taxation/hes-got-the-largest-tfsa-and-now-the-cra-should-give-him-a-tax-bill/
    thanks.

    ReplyDelete
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    1. Avrex, as per this post, the penalty can be 100%-- I have not spent time to determine if the person in the article broke the rules or not.

      http://www.thor.ca/tax-alerts/punitive-tfsa-audits/

      Delete
  7. If you have 500k how would you invest it.

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    Replies
    1. Accountants are not allowed to provide investment advice. Sorry

      Delete