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 Chartered Professional Accountant and a partner with a National Accounting Firm 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 are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned. Please note the blog posts are time sensitive and subject to changes in legislation or law.

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.