Written on behalf of Feigenbaum Consulting
For people living on both sides of the border, managing money can come with additional complexity that doesn’t apply to those who don’t travel back and forth between residences in Canada and the United States. Tax-Free Savings Accounts are a tool most people can use to save money and avoid tax on the interest generated by their savings. However, if you aren’t a resident of Canada, you aren’t allowed to contribute to an existing TFSA (however you can keep money previously deposited into one). A recent decision from Canada’s Federal Court showcases some of the problems emigrants from Canada may face if they contribute to TFSAs while abroad.
Taxpayer moves abroad and gets advice to contribute to TFSA
The taxpayer involved in the issue first faced a penalty associated with her TFSA in 2009 due to making contributions that exceeded what she was allowed to contribute. She paid the $33.81 penalty without delay.
In 2010 she left Canada and lived in a number of countries before settling in New York. She still works there as a school teacher. She continued to make contributions to her TFSA, though they were normally small amounts. The exception to this is when she made a $30,000 contribution in 2014. She had made this contribution in order to save for retirement and did so at the advice of her Canadian banking representative. The taxpayer told the bank rep that she was no longer a Canadian resident, but was still advised she was within the rules and could contribute.
Canada Revenue Agency penalizes TFSA contributions
It turns out the banking representative had given the taxpayer incorrect information. Upon learning of her mistake she closed her TFSA, withdrew the money from it, and called the CRA who advised her to submit a letter requesting a waiver of penalties. The taxpayer sent a letter to the CRA’s TFSA processing centre and requested that the Minister waive her liability on the excess contributions she made from 2010-2018. She explained that she was not aware she could not contribute to her TFSAs and had been incorrectly advised on that matter by her bank.
The CRA denied her first request, stating that she had been notified about excess contributions in 2009 and told her that she owed $27,640.74 in tax, penalties, and interest. The taxpayer submitted a second request focusing on the years 2014-2017, adding that the CRA’s explanation for denial focused only on her over-contributions, not her contributions under the limit while living in the United States.
Again, the taxpayer’s request was denied. The CRA wrote a denial with a similar explanation as the first time.
The court looked at the responses provided by the CRA, writing, “The basis underlying the Delegate’s decision to deny (the taxpayer’s) request was that (the taxpayer) continued to make excess and non-resident contributions to her TFSA from 2010 to 2018, after the CRA’s 2010 Letter notified her about excess TFSA contributions made in 2009.”
The court found that the issue was not “excess contributions” but was instead contributions made while living in the United States. The court wrote it was unreasonable for the CRA to suggest that the taxpayer had continued to make excess contributions after being warned because she did not make that mistake after the first notification. Ultimately, the CRA failed to address the taxpayer’s argument. The ruling granted a judicial review of the decision, and we will be sure to follow up when more information on the case becomes available.
Contact Feigenbaum Law for a custom solution to your personal tax planning needs. Our tax lawyer’s unparalleled knowledge of US and Canadian tax makes us leaders in this field. Contact us about making your transition across the border as smooth as possible. We offer services to clients in the US, Canada and around the world. Contact us to learn more about how we can help or call us at (905) 695-1269 or toll-free at (877) 275-4792.