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man had called the CRA and was told he could contribute only $4,000 in 2011, since the $1,000 in interest earned and withdrawn in the previous year would be deducted from his new limit.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