Since October of last year, the government’s new “Tax Free Savings Account” program (here is the official page from Revenue Canada) has turned into a bit of a hot mess, as our neighbours to the south are fond of saying.
The program started at the beginning of 2009 after being introduced by Finance Minister Jim Flaherty in the 2008 federal budget. TFSAs are meant to be Canada’s answer to the US Roth IRA or the British Individual Savings Account, allowing after-tax deductions to be placed in the account and then withdrawn tax-free – including capital gains. Many Canadians have jumped on board for this new program as a means of jumpstarting tax-free savings for real estate investments and to lower their borrowing amount of a first or second mortgage.
Problems started because many contributors to these accounts did not realize that withdrawals from the TFSA increase the available contribution room not in the CURRENT calendar year, but in the FOLLOWING calendar year. For example: if you contributed the maximum allowable ($5,000) into the account in January 2009, then withdrew all of it in July, then put it back in October of that same year, you still wouldn’t have the contribution room left until 2010. So that isn’t allowed, and many misunderstood.
The government then sent out letters telling folks in this position (about 1.5% of TFSA holders) they were out of line, and that they would have to pay penalties. Then they said you could wait until you received a notice of assessment, but you would still have to pay penalties. Now, per an article by Jonathan Chevreau in the Financial Post, you may in fact not have to pay those penalties after all. According to a presser from the Finance Minister and Revenue Minister: “we have taken the decision to be as flexible as possible in cases where a genuine misunderstanding of the TFSA contribution rules occurred.”
It is good for hapless investors that they’re willing to be flexible: the penalty is a 1% per month fine for each month an overcontribution remains in the account. If the transgression is considered deliberate, there is an additional penalty of 100% of gains that result from the overcontribution.
The Revenue Agency has now instituted a process whereby account holders will be notified of the oversight, then told how to rectify their situation or file for relief or a notice of objection.
