I received my 2023 Notice of Assessment this week and it contained the full details of my tax assessment, an explanation of changes and other important information, along with a one-page detailed registered retirement savings plan (RRSP) deduction limit and available contribution room statement. What it did not contain, however, was a similar statement about my available tax-free savings account (TFSA) contribution room.

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Be careful moving your TFSA — or the CRA might come knocking Back to video

For this, you need to go online to the Canada Revenue Agency’s portal, My Account or phone the tax information phone service (TIPS) at 1-800-267-6999. Assuming you have the patience to hold (wait times this week were 1.5 to two hours), you can ask an agent for a TFSA Room Statement and a TFSA Transaction Summary, which show the information the CRA has received from your TFSA issuers about your contributions and withdrawals.

Each year, all TFSA issuers are required to electronically submit a TFSA record to the CRA for each individual who has a TFSA. Issuers must submit this information by the last day of February of the following year, and report all TFSA transactions you made on or before Dec. 31 of the prior year.

It’s important, however, to compare the TFSA transaction information the CRA has with your own records to ensure the information they have is correct and up to date. It’s possible that when you look online, especially in the first few months of the year, the CRA may not yet have received and processed the previous year’s transactions, meaning they’re not yet reflected in the TFSA amounts shown online. This could lead to an overcontribution.

The penalty for overcontributing is equal to one per cent per month for each month you’re over your limit. If you get assessed a TFSA penalty tax, you can request the CRA to waive or cancel it, which the agency has the power to do if it can be established the tax arose “as a consequence of a reasonable error,” and the overcontribution is withdrawn from the TFSA “without delay.”

If the CRA refuses to cancel the tax, you can take the matter to Federal Court, where a judge will determine whether the CRA’s decision not to waive the tax was “reasonable.”

The most recent decision involving a TFSA overcontribution, decided in April 2024, concerned a taxpayer who went about transferring his TFSA from one financial institution to another in the wrong way.

The taxpayer had at least two TFSA accounts. At the beginning of 2020, his unused TFSA room was $6,270. He contributed a total of $46,000 in 2020, and so he exceeded his limit by $39,730 and was consequently assessed a penalty tax.

The source of his overcontributions could be traced back to the taxpayer’s actions in early 2020. On Feb. 4, 2020, he withdrew $20,000 from his Fédération des caisses Desjardins du Québec TFSA account, and deposited it the next day into his National Bank TFSA account.

He did the same thing again the following month, when on March 9, 2020, he withdrew another $20,000 from his Desjardins TFSA account, only to deposit it the next day into his National Bank of Canada TFSA. He had also deposited another $6,000 into his TFSA account in early 2020, so his total 2020 TFSA contributions were $46,000, but he only had $6,270 in unused room.

In July 2021, the taxpayer received a notice from the CRA advising him that he had exceeded his TFSA contribution limit in 2020, and telling him he had to pay $2,166 in penalty tax on his excess contributions for 2020.

In October 2021, the taxpayer sent a letter to the CRA requesting that it cancel the tax on his excess TFSA contributions. In March 2022, the CRA wrote to him denying his request, saying it could only do so if the contributions were made as a result of a “reasonable error,” and the individual immediately took steps to withdraw them from the TFSA, which was not the case here.

Following this refusal, the taxpayer filed a second application in April 2022 for the cancellation of the tax. In June 2022, the CRA again denied his request “because the transfers of funds made in 2020 from one TFSA account to another TFSA account were not ‘direct transfers’ since the transfers were not made by the financial institution.” The result was that these transfers were considered to be regular contributions, putting the taxpayer in an overcontribution situation.

The taxpayer appealed this decision to the Federal Court. He argued that “he (had) acted in good faith in transferring funds from one TFSA account to another.” But the CRA maintained that the taxpayer’s error in this case was not a “reasonable error” because he admitted he had not made his transfers in the manner prescribed by the CRA (by asking his financial institution to do so directly) since he was unaware of the obligation to do so. In the CRA’s view, its exercise of discretion to waive the penalty tax would not be appropriate in the circumstances.

The judge reviewed the arguments and then cited various prior cases dealing with similar scenarios in which it was held that it was up to the taxpayer to understand the TFSA rules, including how to property transfer funds “directly” from one TFSA to another.

It can’t simply be done via a withdrawal and subsequent deposit, but must be done directly by the financial institution. In these types of cases, the courts have consistently held that the CRA’s refusal to treat such errors as “reasonable errors” (which would allow the CRA to waive the tax), was, itself, reasonable.

The judge ultimately expressed sympathy for the taxpayer, but said he was “bound by the jurisprudence and principles identified by my colleagues. My role is not to rule on the merits, but to assess whether the (CRA’s) decision is reasonable, determining whether it is intelligible, transparent and justified.” The judge concluded that it was, and dismissed the taxpayer’s case.

While the CRA sought costs, the judge refused to award the agency anything owing to the unfortunate circumstances of the case.

Jamie Golombek, FCPA, FCA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com.

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