Although approximately 6.7 million Canadians now have Tax-Free Savings Accounts (TFSAs) according to the Canada Revenue Agency (CRA), the tax rules dealing with withdrawals and re-contributions have not been well understood. According to the Taxpayers’ Ombudsman’s report issued on August 8, 2011, the CRA should have been more proactive in informing Canadians about the tax consequences of the TFSA.
In 2010, many taxpayers were hit with penalties for re-contributing funds that had been withdrawn in 2009 and re-contributed during the same year. Under the TFSA rules, amounts withdrawn can be re-contributed, but the TFSA room allowing for the re-contribution does not become available until the first day of the following year. In response to 2009 over-contributions, the CRA indicated in 2010 that they would review situations where over-contribution penalties were assessed, and would not penalize situations where individuals used their TFSA as a regular banking account in 2009, making deposits and withdrawals on a frequent basis, or where individuals transferred funds between TFSAs at different institutions using a withdrawal and a contribution. In both cases, the TFSA balance could not exceed $5,000 at any time in 2009.
On August 19, 2011, the CRA announced a similar relief program for 2010 over-contributions, offering to be as flexible as possible in relieving penalties in cases where a genuine misunderstanding of the TFSA contribution rules occurred. Many of these over-contributions were likely made in the first months of 2010, before the CRA assessments of penalties for over-contributions in 2009.
Before any assessments are made, holders of TFSA accounts where there may have been an over-contribution will receive a letter from the CRA asking them to provide further information about their accounts. According to the CRA, every TFSA holder who receives a letter indicating that they may have over-contributed will be able to ask the CRA to review their specific file and, where appropriate, waive taxes on excess contributions for 2010. The proposed TFSA return (which will presumably be sent with the letter) is not a notice of assessment and if you receive one, you will have 60 days to respond. If you have questions regarding such a notice, please contact your BDO advisor.
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