Lisa will pay dearly for over-contributing to a tax-free savings account. She knew that up to $5,000 was free of tax, but thought she could deposit more. So, she moved $21,000 from her chequing account into her TFSA.
Now she has received a $1,240 tax bill for her excess contribution in 2009. And since the money stayed in the TFSA until May of this year, she’ll get a large tax bill next year too.
I’m aware of all the comments at my blog from those who did read the rules and refuse to absolve others who didn’t. Canadian Capitalist, a blog I usually admire, came out in favour of the onerous tax hits for everyone who made errors in the first year.
Still, I think there’s a fairness issue that I hope the Taxpayers’ Ombudsman will examine. Just look at the chronology.
The TFSA launch date was Jan. 1, 2009, but the Canada Revenue Agency didn’t start sending out tax assessments until June 1, 2010. This meant Canadians could make mistakes for 17 months before being told they owed 1 per cent a month on excess contributions.
Many people will have to pay tax on over-contributions for 2009 and for the first half of 2010 as well (until they make the needed adjustments).
Remember, too, that TFSA contributions are made with after-tax money. So, those being penalized are double-taxed — all to pursue a little tax-free income.
Check out the comments below from federal Finance and CRA sources, which help explain why the rules were written the way they were. Then, read Lisa’s story.
LS later told me a story (see her June 17 comment) that is similar to Lisa’s in many respects. Her tax bill is $1,230. She can’t afford to pay it and she’s contacting her MP.
If you’re upset, write to your MP and to finance minister Jim Flaherty. Say that the TFSA was marketed heavily by financial institutions that gave out misinformation and lacked safeguards against misuse.
Where were the verbal warnings and online alerts that could stop people from making errors?
I’m in favour of taxes when applied fairly. But this current enforcement effort, in my view, doesn’t pass the smell test.