Were the TFSA rules explained properly?

September 14 2010 by Ellen Roseman

Who can forget the uproar last June when 70,000 Canadian taxpayers were notified that they owed penalties for breaking the rules on their tax-free savings accounts?

I argued in this post that the government and financial institutions didn’t do enough to tell Canadians how to manage these new tax shelters.

Why didn’t they go out of their way to warn everyone not to take money out of a TFSA and replace it in the same year? Why didn’t they spell out the stiff fines that would result if you used the TFSA as a bank account?

Now that the penaties are being reversed, others are coming to agree with me that the TFSA rules need to be fleshed out.

Evelyn Jacks, tax author and expert, polled her readers on this question:

Do you think the rules for utilizing tax-free savings accounts are clear?

She received 58 responses — 18 said yes and 40 said no.

It’s significant to note that the tax and financial professionals who took her survey represent not only their own views, but those of thousands of clients.

One adviser said all his clients had questions about the TFSA. Even he found there was no up-to-date and official source that clearly explained them.

MoneySense magazine has an online feature, asking people about TFSA questions and seeking advice from a tax pro. There’s also a quiz in the current issue, exploring common myths about TFSAs.

A question posed by one of my readers stumped the CRA’s spokeswoman, Caitlin Workman, until she checked it out more thoroughly.

Here’s what he asked:

Suppose I put $5,000 into my TFSA this year and earn $1,000. I take out the $6,000 before year-end and put it back on Jan. 1, 2011.

How much is my new contribution limit next year? Is it $5,000 or $4,000?

This man had called the CRA and was told he could contribute only $4,000 in 2011, since the $1,000 in interest earned and withdrawn in the previous year would be deducted from his new limit.

I said that was wrong. So did tax expert Jamie Golombek of CIBC, whom I consulted. Eventually, Workman backed down and said the reader had been given misinformation.

Let’s hope the CRA and the financial institutions learn a lesson from this mess.

Make sure the rules are crystal clear. Use examples and typical scenarios. Tell clients over and over again.

There’s no such thing as over-communication when it comes to warning people about the possibility of making costly mistakes.

When you’re dealing with a mass market product such as the TFSA, use the mass media to get the message across in a widespread and meaningful way.

14 comments

  1. Canadian Couch Potato

    Sep 14 2010

    The rules are indeed pretty confusing. I found Gordon Pape’s book, The Ultimate TFSA Guide, to be quite helpful in making sense of them.

  2. Tiny Potato

    Sep 14 2010

    I think the rules were relatively clear. At some point, I think people as a whole need to start taking more responsibility for seeking out information and understanding. Too often we are quick to blame others for “not telling us”. Well, how much effort did people put in to FIND OUT?

  3. PG

    Sep 15 2010

    I remain mystified by folks such as “Tiny Potato” who go on and on about investors needing to take responsibility and “FINDING OUT”.

    Okay, fair enough. But in the relatively straightforward example given by Ellen, the “FINDING OUT” process included a call to the CRA itself which, it turns out, was DEAD WRONG!

    It is unsettling to learn that not even the plan administrators are 100% reliable for advice/information. From all that I have read previously, they appear to be 100% reliable in assessing penalties!

    And what I really find fun about TFSAs is that we are only in year 2. As the years roll by and the dollars add up, virtually everyone’s situation/activity will become more and more unique.

    To me, planholders’ ability to withdraw temporarily and then eventually “make up” is a ticking logistical and reporting nightmare.

    (Compare this to RSPs where, ignoring allowable redeposit exceptions, once you take out the money, it’s out.)

    So to Tiny Potato, yes we do have a responsibility, but so does the government.

    I suggest there’s an employment opportunity out there for someone to develop a good software tracking program acceptable to the government – or they could provide one themselves.

    Trust me, if you’re going to be an active TFSA-er, you’re going to need one!

  4. Danny

    Sep 15 2010

    Would it have been so hard for the government to track net contributions with, say, a 30 day delay between contributions and withdrawals?

    Waiting a whole year is so inconvenient and you can’t take advantage of higher rates or better account features, etc.

    Companies will now promptly reduce rates in February or March of every year.

  5. Marie

    Sep 15 2010

    So if you have a few mutual funds with a single company, can your transfer $ from one MF to another during the year or is it considered a withdrawal?

  6. MA

    Sep 15 2010

    I went back to look at the old blog postings you made about the TFSA. First off, I’d like to thank you, Ellen, for removing most of my posts from the comments section. Heaven forbid should one of your reader’s call someone out on being wrong.

    Especially going back to Lisa’s story. In her original complaint – and I remember this clearly – she said she was making the deposit online, and noticed on the page that it said “overcontributions will be penalized 1% that excess contributions remain in the account”…and then, of all things, she said that that line didn’t concern her, so she ignored it.

    When I asked what you thought about this situation, you ignored the question. But you got in touch with her bank, and although she blatantly denied caring about the warning that was right in front of her, her penalty was waived.

    I have compassion for the people that got screwed over by the banks, or didn’t get the correct information from the government…but a majority of the people either ignored the warnings that were right in front of them, or didn’t even bother getting the information about the account.

    Heck, my own brother got dinged for moving his TFSA from bank to bank, trying to take advantage of an extra quarter % interest rate. He also did so without bothering to read up on what the limitations and rules for the account were.

  7. FM

    Sep 16 2010

    I tend to agree with MA and PG on this. When I was looking at putting money into a TFSA, it was clear to me that if I pulled the money, I couldn’t put it back until the following calendar year.

    What I didn’t catch was the fact these accounts could contain more than just cash!

    After figuring that out, I had no problem transferring the cash from the bank to my financial advisor to put into mutual funds.

    I asked him if he would run into any problems with the “in and out” in one year, and his comment was “not if you do the right paperwork”!

  8. Geoff

    Sep 18 2010

    gotta agree with fm,ma,pg on this (maybe a majority now of us now) – I found the rules well explained and besides researching investments is the consumers’s responsibility to find out all the deals.

  9. Geoff

    Sep 18 2010

    err details.

  10. MA

    Oct 4 2010

    I felt I needed to be a little more aggressive to get your attention, Ellen, and it seemed to work.

    But going back to Lisa’s story, and how she didn’t think that applied to her…I’ve read pretty much all of your blog posts and every comment that goes with it (save for the 500+ in Bell hell), and I believe that one of your main objectives for teaching consumers is that when dealing with large sums of money, you don’t just throw it away based on assumptions or thoughts that “rules” don’t apply to you.

    You research the crap out of whatever you’re spending large amounts of money on.

    That, to me at least, is one reason why I don’t have much sympathy for the people that got dinged with this fine. $5k is a big deal of money for me, and so when I was opening the account, I did my own research about it.

    I got the information sheets from CRA, and when there was a doubt in my mind about how to interpret one of the rules, I would post on message boards for a clearer understanding.

    It just seems like a lot of these errors were the responsibility of the users, but they were quick to jump on the bandwagon of blame CRA/the bank.

    Regardless, I still appreciate how you handle customer complaints. As a new homeowner, I’m sure I will be contacting you for support in the near future when one of my appliances breaks down and the company tells me to shove it.

  11. MP

    Apr 15 2011

    I am still not over with this TFSA Nightmare!

    Going back to the history in April 2009, i was making an online transfer from my one bank a/c to another bank savings a/c, which also had the TFSA a/c (0 balance). Transaction was 34K and somehow i (or the system) selected the TFSA a/c and moved all the money in. I immediately realised the error- but could not do anything as it takes 1 day to transfer the funds and its on hold for 5 days before you can access funds.
    I waited 5 business days and moved out 29K out of it. It was just a honest error. In NOA of 2009 (April 1)- CRA mentioned about the excess money and their system still showed the amount in the a/c. I immediately called them and based on the representative’s suggestion, sent a letter to clarify it. a month later (May 10) response came back asking for additional details in order to review it. I pulled out bank statement and wrote a letter again with supporting documents, hoping that it will clear all questions. I kept on waiting and calling them- and the response always was- its still being reviewed.

    Then came the July/Aug deadline- when they wanted all to fill out a TFSA return. I did that and infact had to pay the 290 dollars on Aug 10 as they said- CRA will refund me based on their review outcome.

    I have never received anything till date- and my understanding is that they have happily accepted the money and don’t want to give any refund.

    Fast forward to NOA 2010 – and it still says that i have excess contribution in TFSA. i checked the online CRA system and it still shows 24K excess. I called CRA for inquiry and the feedback was- they see the 290 dollars credit- but its still in review.. Oh my God..almost a year now and still in review..and when i asked what shall i do..they suggested me call back later–

    when is later??? for a year they didn’t do anything..and now i am still in this TFSA mess..

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