August 30 2011 by Ellen Roseman
The Canada Revenue Agency has sent letters to more than 100,000 people who contributed too much to a tax-free savings account last year. They have 60 days to respond or else pay a penalty equal to one per cent a month.
Only 72,000 people got a warning last year. But the percentage of errors is lower, given the greater number of TFSA contributors.
Revenue Minister Gail Shea is promising leniency to those who made an honest mistake. I’ve already heard from a half dozen of them, including one close to home (my adult son).
The letters are going out just after J. Paul Dube, the Taxpayers’ Ombudsman, released a report saying the CRA didn’t do enough to explain the rules. In particular, many people didn’t wait a year to replace TFSA funds they had withdrawn.
He said the agency couldn’t just publish information, but had to make sure that Canadians could find the information.
Did the government create too complex rules for the TFSA? Did it communicate well enough to the banks selling — and in many cases, overselling — the new savings product?
A Canadian Press article had some criticism of the year-long blitz by the government to lessen the rate of TFSA errors.
Focus-group surveys commissioned by the agency last year indicated Canadians found the official TFSA website confusing and difficult to navigate, even after it was revamped to better highlight the over-contribution rule.
Other internal reports suggested the agency’s language in describing TFSAs to the public has been unclear.
It’s very easy to remove money from a TFSA, a factor that could underlie some of the inadvertent over-contributions.
“The risk of using a TFSA is that you may be tempted to take money out for another purpose,” says Neil Jain, founder of Money Life Skills in Toronto, quoted in the current issue of MoneySense magazine.
“With an RRSP, you’ll think hard before you withdraw from it.”
RRSP withdrawals are heavily taxed and you never get the contribution room back. I’m sure my own RRSP would be much smaller if I could tap it easily to satisfy spending urges.
So, if you get one of those CRA letters — they’re bulky, about eight pages apiece — try to put up a fight. Ask your financial institution to cover the penalty, especially if you weren’t warned about running afoul of the rules. Ask the CRA for clemency.
You have a good chance of being absolved of liability, given the confusion that still reigns in the second year of the new product’s life.
News flash: I’m giving my University of Toronto course, Investing for Beginners, again this fall on Thursday nights, starting Sept. 15. Here’s a link.
Hope to see you there if you can make it to the downtown campus.