The Canada Revenue Agency issued a cautionary press release earlier this year about the importance of sticking within your tax-free savings account contribution limit. Titled Watch your limit – stay within it!, the CRA reminded Canadians that it’s possible to overcontribute to a TFSA in a number of ways.

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One example of an inadvertent overcontribution, cited by the CRA, can occur if your TFSA is set up for pre-authorized contributions and you make additional contributions without verifying the amount of room you have available. Another is if you have multiple TFSAs with different financial institutions and you’re not carefully tracking all the contributions you are making.

But a third route to a potential TFSA overcontribution is if you misread or misinterpret your TFSA limit as shown on the CRA’s My Account self-service portal. That’s exactly what happened in a recent case. But first, let’s recap TFSA contribution basics and the consequences of a non-deliberate overcontribution.

Your TFSA limit is cumulative and begins when you’re 18 years old, assuming you were a resident of Canada in that year. Your TFSA contribution room is made up of three things: the annual TFSA dollar limit, plus any unused contribution room from previous years, less any withdrawals you made during previous years (excluding direct transfers to another TFSA).

The annual TFSA dollar limit for 2024 is $7,000, and your cumulative limit can be as high as $95,000 in 2024, assuming you were at least 18 years old and a resident of Canada continuously since 2009, and have never contributed.

If you accidentally overcontribute, the CRA charges a penalty tax of one per cent for every month that any excess contributions stay in your account. Withdrawing them as soon as possible will help reduce the penalty tax.

The CRA does, however, have the power to waive or cancel all or part of the penalty tax if it determines it’s appropriate to do so after reviewing all factors. To consider your request, you need to write to the CRA and explain why the overcontribution arose and why it would be fair to cancel or waive all or part of the tax. Should the CRA refuse to do so, you have the right to a second review. Should that also be unsuccessful, you can seek a judicial review in Federal Court, where the judge will determine whether the CRA officer’s decision was reasonable.

The troubles for the taxpayer in this recent case began in early 2020. His 2020 TFSA contribution limit as of Jan. 1, 2020, was $6,337, but he contributed $12,563 for the 2020 tax year. The CRA determined that his excess TFSA contribution for 2020 was $6,226, and sent him an “educational letter” in July 2021 with a warning that “in the future, if you continue to contribute more than your contribution room allows, the CRA may impose a tax of one per cent on you for each month that the overcontributed amount remains in your TFSA.” No payment was ever made in respect of this overcontribution penalty.

The taxpayer’s woes continued into 2021 when his contribution limit was negative (minus $226), but he nonetheless proceeded to make a TFSA contribution of $12,153, representing a total overcontributed amount of $12,379 for each month of 2021. In July 2022, the CRA determined his overcontribution tax to be $123.79 for each month, for a total of $1,485. Add in arrears interest and the total penalty tax was $1,566.

The taxpayer wrote to the CRA asking that this amount be cancelled, saying he was “misled” by the information on the CRA My Account portal, which indicated “very different” TFSA contribution limits. He pointed to copies of CRA documents, presumably My Account screenshots, showing he had TFSA room of $12,335 for 2020 as of Jan. 9, 2020, and TFSA room of $12,237 for 2021 as of Jan. 12, 2021.

“I have always consulted My Account before contributing to my TFSA and contributed according to the amounts displayed,” the taxpayer said. “If the contents of My Account are useless, at least have the decency to notify me.”

The CRA denied the taxpayer’s first request to cancel the overcontribution tax, explaining that the information posted in My Account only includes transactions reported to the CRA by financial institutions up to a certain point in time. Since institutions have until the end of February of the following year to submit their report for the prior year, the information accessed in January may only be partial. A warning to this effect is displayed on the CRA’s website, and it’s ultimately up to the taxpayer to keep track of their contributions and withdrawals.

In late 2022, the taxpayer again wrote to the CRA to say he did not accept this first decision and asked for a second-level review. This was also denied, so the taxpayer went to the Federal Court. In these types of cases, it’s up to the person requesting the judicial review to prove the contested decision was not reasonable. The characteristics of a reasonable decision, based on prior jurisprudence, are its justification, its transparency and its intelligibility.

Under the Income Tax Act, in order for the CRA to waive any TFSA overcontribution tax, two conditions must be met: it must be shown that the taxpayer made a reasonable error and that they took rapid steps to withdraw their excess contributions to their TFSA as soon as possible.

The judge reviewed all the facts and concluded the CRA’s decision not to waive the overcontribution tax was reasonable since it was up to the taxpayer to know his own TFSA limit.

“In a self-assessment system … a taxpayer must inform themselves … to know the limits of their annual contributions,” the judge said. “The My Account online (portal) contains a warning about receiving information from financial institutions. (It) cannot constitute a reasonable error to have ignored the warning and not to have compared the (incomplete) information online with one’s own information.”

The judge concluded that the taxpayer could not ignore the warning on the site and the 2020 educational letter from the CRA and then claim a reasonable error in 2021 for subsequent overcontributions. In short, “Ignorance of the law cannot constitute a reasonable error.”

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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