written on behalf of Feigenbaum Law
A Tax-Free Savings Account (“TFSA”) can be a great way to invest some extra money in order to collect interest on it without paying tax. However, the amount of money someone can contribute to a TFSA in any given year is limited, and individuals should be careful about putting too much money into a TFSA, even if by accident. This was a lesson a taxpayer recently learned following a decision from the Tax Court of Canada.
The Initial Deposit
The taxpayer owned a roofing company that employed four people. His bank for business purposes was Bank of Montreal, but his personal bank account was with PC Financial. He claimed that his father “takes care of all the numbers” referencing tax-related issues relating to the business. He said he sometimes called his dad to ask if he should contribute to his TFSAs, but that his dad told him to call Revenue Canada.
At some point in the year, the taxpayer was cut a $40,000 cheque from the company which was described as a management fee and was intended to be included in the taxpayer’s income for tax purposes. The taxpayer intended to deposit the cheque into his personal chequing account, however, he inadvertently deposited it into his TFSA. The taxpayer claimed that there was confusion relating to the deposit function of the particular automatic teller machine (ATM) he was using, which including the TFSA as on of the options under ‘chequing accounts’. The design had since been changed, but this was the case at the time of his deposit.
He claimed that he would not have deliberately deposited the cheque into his TFSA, as he was aware of the rules regarding overcontribution. Rather, he was making the deposit late at night and the machine made it easy to confuse the two accounts.
The Error is Discovered
Some time went on before the error was noticed. The taxpayer did not receive regular statements from his bank, and he had enough in his chequing account to cover day-to-day expenses, so the missing $40,000 was not immediately drawn to his attention. The error was only discovered the next year when his father was speaking to a CRA official about an HST matter. The official from the CRA told the father that the taxpayer had overcontributed top his TFSA by $39,500, but that a withdrawal of $29,000 would put the account back into compliance. The taxpayer made the withdrawal the same day. However, it was too late to escape any consequences.
The penalty for overcontributing to a TFSA can be high. An individual’s annual limit is $5,500. The rules state for every month an individual has an excess TFSA amount, the individual is required to pay a tax equal to 1% of the highest amount in the account for that given month.
In this case, the taxpayer had an excess of $39,500 for six months, leaving him with a tax bill of $2,370. The court upheld this penalty and the taxpayer was left to pay it. The court was unmoved by the accidental nature of the deposit, holding that,
The Appellant’s “excess TFSA amount” at the end of each of July, August, September, October, November, and December, 2016 was $39,500. As the Appellant did not pay the tax or file the return in respect of the “excess TFSA amount” for that year, the Minister’s 2016 assessment is correct.
Perhaps the outcome would have been different had the taxpayer noted the mistake soon after making the deposit, however, given the fact that the overcontribution was noted first by the CRA, there was little room to find in the taxpayer’s favour. This case is demonstrative of the importance of paying close attention to one’s financial transactions and to keep tabs on deposits and withdrawals, particularly when the amounts are significant.
Contact the experienced lawyers at Feigenbaum Law if you need a custom solution to your personal tax planning needs, either within the United States or Canada. We can be reached by phone at (905) 695-1269 or online in order to schedule a consultation at your convenience.