June 12 2010 by Ellen Roseman
Since I did my Toronto Star column today, I’ve heard from many people who were penalized for TFSA over-contributions or transfers. They’re also leaving comments at the Star’s website.
Here are some further points I want to make after reading their stories and reflecting on what has happened:
* The tax-free savings “account” should have been called a tax-free savings “plan”. People had the impression that they could use the TFSA in the same way as a bank account.
* Financial institutions didn’t do enough to warn customers about the risk of tax penalties if they withdrew money from a TFSA and replaced it in the same year.
* The Canada Revenue Agency explained the rules at its website, but many people didn’t do any double-checking. They relied on their financial institutions for information.
* The message that TFSA contributions couldn’t exceed $5,000 a year was clearly communicated. But the equally important message about the danger of moving money freely in and out of the account got lost.
* Thousands of people made mistakes that resulted in tax penalties far greater than their tax savings. It’s clear the system failed, not the individuals who used it.
* The minority government has an embarrassing tax fiasco on its hands. A public protest could bring some results.
* Fairness dictates treating unintentional errors with leniency in the first year that a tax shelter is introduced.
So, what can we learn from this public policy snafu? I have three ideas.
One, people pay close attention when they’re engaged in a transaction or thinking about doing a transaction. “Just-in-time delivery” is far more effective than explanations given well before there’s an intention to act.
Two, the financial institutions don’t know enough about the TFSA rules to educate customers. They should be required to hand out a one-page warning document to anyone opening a new account or making contributions to an existing account.
Three, transfers of TFSAs should not attract penalties (unless they’re part of a tax avoidance scheme). Yet many people are getting penalized for transferring TFSAs. It’s clear that financial institutions are making errors, but the burden of correction lies on their customers. That’s not fair.
Financial literacy is a hot topic these days. I hope Finance Minister Jim Flaherty and his financial literacy task force can use this foul-up as a case study of what NOT to do in communicating key messages.
Finally, I’m teaching a free course in financial literacy at Ryerson University on Tuesday, June 22, from 5.30 to 9.30 p.m. Please pass along the message to anyone who might be interested.
The workshop is co-sponsored by the Financial Consumer Agency of Canada and the Investor Education Fund. Here’s a link.