Ottawa backs down on tax-free savings account errors

June 25 2010 by Ellen Roseman

Finally, the government has come to its senses about the 70,000 letters sent to Canadians who made over-contributions to tax-free savings accounts or transferred them without the proper paperwork.

In a statement issued this afternoon, the two ministers responsible for the new tax shelter said they recognized the confusion that resulted from lack of understanding of the rules. And they’re trying to make amends.

If you received a request to pay tax on your TFSA, you can wait until Aug. 3 to submit further information (not June 30, the original deadline). Moreover, you won’t have to pay tax if it’s clear there was a genuine misunderstanding.

The Government of Canada confirms that for the 2009 filing year, the first year of the program, we have taken the decision to be as flexible as possible in cases where a genuine misunderstanding of the TFSA contribution rules occurred.

Our intention is to review each situation on a case-by-case basis and, where appropriate, waive taxes on excess contributions for this year.

For instance, individuals who used their TFSA as a regular banking account in 2009, making deposits and withdrawals on a frequent basis, or who have transferred funds between TFSAs at different institutions, but whose net contributions never exceeded the 2009 limit of $5000, may not be required to pay the tax on excess contributions for this year.

This is exactly what I’ve been asking for since taking up the issue in this blog here and here. So has the Canadian Tax Resource Blog, which spotted the potential problems back in February.

The press release doesn’t mention that some financial institutions gave misinformation to customers. They, too, have learned something from this mess — as shown by their willingness to help customers clean up afterward.

Check out one such case involving ING Direct and a client, FS, below.

26 comments

  1. me

    Jun 25 2010

    So, 70,000 people and some institutions messed up and now get a freebee band-aid on their cut, a pat on the head, told to stop crying and go home.

    What about the millions of people who have grade 3 reading level and math skills and did not manage to mess up. What do they get?

    BTW, it was NOT fine print, it was blatantly obvious.

    It’s like the banks and Rogers rewarding new clients, but loyal multi-decade customers get nothing.

    But who said life is fair though.

  2. FL

    Jun 25 2010

    After reading the different articles and blogs about this issue, I am somewhat concerned about a transfer between institutions for TFSA that I made in April 2010.

    My financial advisor has assured me that it was a transfer and not a withdrawal/new contribution. Since I had read comments that some people had been penalized for mistakes made by institutions in 2009, I am just wondering if the same thing could happen to me when 2011 rolls around.

    I have the following questions:

    Is there anything else that I should do, other than checking with my financial advisor?

    Will the government be flexible for those people who may have the same problems for the first half of 2010?

  3. MA

    Jun 25 2010

    Wow, FS got off of her fine after blatantly ignoring the warnings that were provided, admitting that they did not concern her, and still gets the fine waved thanks to ING?

  4. Mithu

    Jun 25 2010

    Ellen, thanks for taking up this issue and resolving it too!

    I wanted to bring to your attention that at the end of 2009, ING Direct had a TFSA interest rate that was higher than other banks to attract more deposits.

    But once everyone made their contributions, ING reduced the interest rate by 1%, knowing that removal of the funds would result in total loss by the clients.

    They used this rule to their benefit and now we are stuck with lower interest rates of ING, even though other banks are giving higher rates than ING because they did not either increase or decrease unreasonably.

    I think it should be made mandatory for banks to hold the interest rate for the entire year, so that customers are not stuck with lower rates after they have made a TFSA contribution to a particular bank offering higher interest rates at that time.

  5. Lex Mackenzie

    Jun 25 2010

    What about those who transferred funds THIS year (2010). We are just as affected, since it was not until March 2010 that any CRA clarification even came out??

  6. Dave

    Jun 25 2010

    What’s the point of using a TFSA for a regular short-term savings account? To avoid paying taxes on the insignificant interest you make every year on your account that fluctuates under $5000?
    It makes sense as a long term strategy, as you can have it built up to a good amount and hope that rates will go up. It aso makes sense if you use it for instruments that actually generate returns.

    Not sure why the government didn’t just pass a blanket rule that the first $5000 of interest from savings or investments every year is tax free.

  7. Dave

    Jun 25 2010

    (oops, I mean ‘Not sure why the government didn’t just pass a blanket rule that the interest from first $5000 of savings or investments every year is tax free.’)

  8. Eug

    Jun 26 2010

    Well, that’s rather disappointing.

    Those of us who actually took the time to read the rules and followed them are effectively penalized with this ruling, at least compared to those who didn’t bother to properly educate themselves about the rules.

  9. H

    Jun 26 2010

    Guess if you made a mistake and got a bill and then sucked it up and paid the bill then you’re screwed.
    Frankly, making this announcement 5 days before payment is due is a little mean too. I’ve already paid my fine and my guess is that I’m not getting that money back. Probably others have also already paid because they didn’t want to pay additional interest. Wonder if there is any retribution for us?

  10. Navin

    Jun 26 2010

    Ellen,
    Thank you very much for taking up this cause, it is a great boon to those who were mis-informed or mis-advised about the TFSA. I for one have closed my account and want to avoid this headache in the future. I completed RC243-SCH-A, and its method of calculating the penalty is flawed to say the least. My penalty wasn’t high, but I disputed the return on its method of calculation.

    Furthurmore to the person with the comment “…What about the millions of people who have grade 3 reading level and math skills…”, professionals such as financial advisors, lawyers, and engineers, have a duty of care to those they advise. If an engineer build a bridge out of clay and it collapses, they are still liable regardless of the fine print. It is assumed the city doesn’t know any better in this subject and they refer to an expert – they are not expected to learn the properties of different types of concrete. Similarly if a financial advisor informs you that there is no penalty and there is, it is a breach of their duty of care. Also I can assure you that I am smarter than you and your possible high-school education. When you finally save enough money in your TFSA maybe you can make the big move out of the trailer park.

  11. James

    Jun 26 2010

    I agree with Navin, despite the rude shot at the end. I found out the rules about the TFSA and did not make any mistake, like some did. However, I don’t begrudge people being granted a little leniency for the first year, since the bank employee never told me about only deposits counting when I opened my account. I had to dig into things to discover that little tidbit. This should have been clearly disclosed at the start. I opened mine on the telephone and they never mentioned a word about anything other than saying I was allowed $5000 per year into the TFSA. They also sent no documentation for me to review.
    I can easily see how people would be confused over this.

  12. me

    Jun 26 2010

    navin wrote:
    “.. it is a great boon to those who were mis-informed or mis-advised about the TFSA.”

    Oh I see, you were in no part at fault for not knowing or willing to read and understand what you were signing or participating in. It was everybody elses fault. Not poor ole me.

    navin also wrote:
    “..Furthurmore to the person with the comment “…What about the millions of people who have grade 3 reading level and math skills…”, professionals such as financial advisors, lawyers, and engineers, have a duty of care to those they advise. If an engineer build a bridge out of clay and it collapses, they are still liable regardless of the fine print. It is assumed the city doesn’t know any better in this subject and they refer to an expert – they are not expected to learn the properties of different types of concrete. Similarly if a financial advisor informs you that there is no penalty and there is, it is a breach of their duty of care.”

    That person was ME.
    Again, for you, it is everybody else fault. It is your responsibility to read and understand what you are signing… that’s why they get you to sign. In addition, YOU are stretching it into lala land with all the advanced rocket science, engineering and law degrees required to understand the rules when investing in a TFSA.
    1. $5000 per year of ‘contributions’. That means putting money in.
    2. Removable at any time without taxes and
    3. Removed monies cannot be replaced, if the replacement will exceed your $5000 contribution limit, until any time after jan 1 of the following year. Or penalties will incur.

    Ohhhh. So hard, my head hurts. I need an advanced degree at some university and years of training.

    navin also also wrote
    “.. Also I can assure you that I am smarter than you and your possible high-school education. When you finally save enough money in your TFSA maybe you can make the big move out of the trailer park”

    Troll behavior, No real defense, so go feral and attack.

    FYI. I have well beyond high school education and as far as saving money. I retired to live off my savings at age 36, close to fifteen years ago, through pure savings since I was six. Came from a family of 10, No lotteries, never ever bought a ticket, no inheritance and no big lucky strike stock investment wins. No mortgage(paid cash), no debts ever(I have savings), $10,000 each in mine and wifes TFSAs. Maxed RRSP’s in high income rate and withdrawing in low income rate. The magic of compounding, buying what I need, not what some ad tells me or what somebody else has and NOT paying bazillions in mortgage and debt interest to ever greedy financial institutions.

    How you doing?

    Oh yeah, and reading and understanding everything before signing.

  13. JimE

    Jun 26 2010

    Mr. me wrote faster than I did, or I would have responded similarly to Navin. Agree 100% with him.

    Read the rules, live with the consequences.

  14. James

    Jun 27 2010

    Hey, me, condescension and sarcasm are the hallmarks of someone who is being disingenuous at best. If you really retired at 36, I doubt you’d waste time on Internet discussion boards. Did you get to retire due to your efforts at putting people down and being a braggart?

  15. V

    Jun 27 2010

    I also paid my fine a few weeks ago. Doubt I’ll be able to get it back.

  16. me

    Jun 27 2010

    James wrote.. “Hey, me, condescension and sarcasm are the hallmarks of someone who is being disingenuous at best. If you really retired at 36, I doubt you’d waste time on Internet discussion boards. Did you get to retire due to your efforts at putting people down and being a braggart?”

    As I said to Navin: Troll behavior, No real defense, so go feral and attack.

    You complain of me be sarcastic and condescending.

    I did jump ship @ 36, believe what you chose that makes you happy. The biggest surprise of retirement is the massive amount of time on my hands. To the point of retirement, this is a “financial” internet discussion board and I do not consider Ellens site or the other financial sites I frequent as a waste of time.

    “Did you get to retire due to your efforts at putting people down and being a braggart?”
    Being a braggart and putting people down? How in any way does one obtain financial independence by these actions? Did you actually read what you wrote before posting?

    I was challenging Navins ignorant angry assumptions of my intelligence, position, financial capabilities and the stereotyping of people living in trailer parks. He asked, I answered and you did not like the response so you continued with off topic irrationality and drive by insults.
    I will not continue to divert Ellens TFSA thread by responding to angry trolls.

  17. T

    Jun 27 2010

    The banks (and their advisers) are at the mercy of the Canadian government when it comes to offering these accounts.

    When the TFSA was introduced, the banks scrambled to introduce the necessary platforms and training. Unfortunately, there was very little information provided to each bank about the intricate details of the accounts.

    When Financial Advisers tried to call the government to clarify on behalf of their clients, government hotlines would tell them to contact their local Financial Advisers (?!). It became a vicious circle.

    Unfortunately, if they advised clients to AVOID the TFSA until the information was more readily available, the advisers would be liable for any ‘lost’ tax-free growth in their clients’ non-registered accounts because, as Navin so aptly put it, they are required to ensure that their clients participate in the most suitable and efficient account.

    In this instance, ‘reading the rules’ didn’t seem to help. Case in point: when the TFSA was initially released, the government was adamant that the contribution limit would rise to $5,500 in 2010. Many official documents (including the website) advertised this figure.

    As 2009 came to a close, the contribution limit was mysteriously maintained at $5,000 for 2010. Many clients put off contributing the additional $500 to their RRSPs, in order to contribute the money into their TFSAs (a strategy typically used by clients who anticipate high pension or RRSP income in retirement).

    And the TFSA is just the tip of the iceberg. Many advisers (and banks) initially refused to offer the RDSP (registered disability savings plan) due to the lack of coherent structure and rules. Unfortunately, this caused many clients to lose out on thousands of grant $$’s.

    This does NOT mean that Canadians should avoid these accounts. They have many tax advantages. There is a ‘gray’ area between ‘blindly using the account’ (and hoping for the best) and ‘never using the account’ (and losing valuable tax savings in the name of protest).

    Clients should always keep written copies of account rules, and clients need to take accountability for their actions. You can’t expect a bank to proactively warn you whenever you do a transaction.

    When you make a withdrawal from an RRSP, you don’t expect your bank to provide an onslaught of ‘what if’ warnings (e.g. ‘you cannot recontribute this money without dipping into your allowed contribution room’). Banks expect that you will ASK in order to clarify the rules around YOUR account.

    If your bank tells you that it is OK to recontribute into your TFSA in the same fiscal year as your withdrawal, note the time of the call, the name of the person who provided the information and proceed with the transaction.

    If they gave you bad information, take it up with the bank. If the bank received bad information from the government, they will take it up with the government.

    Everyone is trying their best to provide good service. (Believe me, $100 in a complicated RRSP account provides the same profits to the banks as $100 in an uncomplicated regular investment account, even though it requires many more hours of paperwork and compliance.)

    But sometimes, mistakes and ambiguity happen. When it does, calmly exercise your right to make a complaint.

    In this TFSA example, everybody still seems very angry, even though the government AND the banks have put time and money towards correcting the errors.

    Yes, it was frustrating to receive the bill. Yes, it was frustrating to pay the bill. But to lean back and continue to say that you’re ‘screwed’, even though you have been given the opportunity to reverse the payment in good faith, is a little far-fetched.

    Instead of ‘guessing’ that you’re not going to get your money back, initiate the process. The world is not a perfect place. We should count ourselves lucky to live in a country that provides access to these types of accounts AND takes accountability when our government and/or banking institutions make errors.

    Personally, I think that the opportunity for tax-free growth over the long-term FAR outweighs these (sometimes frustrating) hiccups in the system.

  18. James

    Jun 27 2010

    Hey me, it’s quite clear who the troll is here, and it’s you. You came in here to deliberately start a fight with Navin by making specious claims as to your financial independence.

    Please don’t come onto these boards with the attitude of a rebellious teenager and you won’t get people like me calling you on it.

    The people who made a mistake with the TFSAs (and I’m not one of them) don’t have time for your nonsense.

  19. second opinion mike

    Jun 28 2010

    It is amazing the number of people who are totally unforgiving of the errors of others. Some even whine that they are “being penalized” for obeying the rules.

    I am at a loss as to how somebody transferring a tax-free savings account between companies would either incur a penalty or receive a benefit in some material way.

    If you did not make an error, then good for you. If you erred but did not benefit, then learn from this. If you intentionally broke the rules for personal benefit, then pay your fine!

    Taxes are not meant to be vindictive, just to be fair across all citizens.

  20. Mo

    Jun 28 2010

    If the rules governing the TFSA were crystal clear, then how did so many individuals and professionals (banks and financial advisors) miss the mark?

    Part of the problem lies with the term “contribution”. For the sake of argument, let’s say that you are asked to “contribute” $50 to your firm’s annual picnic.

    You make your “contribution”, then realize that you are short on cash, and ask for $20 back to tide you over until the following day. First thing next morning, you hand back the $20.

    How much did you “contribute” to the company picnic? If you use the government’s calculation method, you have “contributed” $70.

    Sure, the rules governing the TFSA might be fairly straightforward, but the terminology needs a little tweaking.

    It seems obvious that many of the mistakes were not deliberate; for that reason alone, it is incumbent upon the government to do the right thing and avoid penalizing hard-working taxpayers for what is obviously an honest mistake.

  21. MA

    Jun 28 2010

    @Mo:

    I don’t think the confusion comes from the terms. It comes from a lot of people making assumptions. Take, for example, the story of FS above. If you look at her original explanation of how ING “screwed her over”, it will have a paragraph saying something along the lines of:

    “I deposited my original $5k, then had to withdraw some a couple of months later. When I had more money, I topped my balance back up to $5k. When making the second deposit, a small warning came up saying not to overcontribute the $5k, but that didn’t concern me…”

    There’s a perfect example of someone making assumptions as to what the terms actually mean. Contribution limit does not equal ending balance.

    Others have noted how SO MANY people have been slapped with this fine. Of the 4.7 million people who opened an account, 70,000 got a fine. A bunch of these fines were levied on people who made legitimate bank to bank transfers, which counted towards their contribution limit and they will be waived. So we’re looking at less than 2% of people who made the mistake.

    @me:

    Awesome posts man. You ripped Navina a new one. It’s pretty sad when you see people on the internet saying “I’m so much smarter than you, blah blah blah.”

    In the other TFSA thread, I was talking about how easy these rules were to comprehend in comparison to some of the tax laws I had to learn about in a university tax course and get blasted with the “Maybe I should take a uni tax course to understand this…Mr holier than thou has university tax education, whoop de doo!” From what I see, it takes comprehension of the English language to understand these rules, not tax knowledge.

    But back to the whole leniency issue…what is CRA being lenient on? For the people that overcontributed tens of thousands of dollars, will they get the fine waived and get to keep the extra (not much, but still extra) interest they reaped because of the overcontribution?

  22. Frances

    Jun 30 2010

    It bears repeating. If you have already paid your tax and fine, you can still appeal. Just be patient because the CRA takes its own sweet time.

  23. JimE

    Jul 28 2010

    Remember, in order to take advantage of this concession, individuals must respond to the CRA letter no later than August 3, 2010 (extended from June 30, 2010) by providing additional information about their TFSA accounts.

    Otherwise, the CRA will issue a Notice of Assessment confirming the penalty tax.

  24. Jim Robbins

    Dec 4 2010

    I have a TFSA with one bank and contributed the max 5k in 2009. I opened a 2nd TFSA account at another bank in 2010 and contributed the 2010 max 5k there.

    I wish to close the 1st account and tranfer the full amount to the 2nd account. How do I do it without penalty?