Taxpayer Wins Challenge Against Penalty for Non-Resident TFSA ContributionsFebruary 4, 2021
We recently wrote about a Federal Court decision that rejected a taxpayer’s application for judicial review after the Canada Revenue Agency (“CRA”) found that he had over-contributed to his Tax-Free Savings Account (“TFSA”).
More recently, the same court allowed a taxpayer’s application for judicial review, after the CRA refused her request to waive tax, penalties and interest assessed on her excess and non-resident contributions to her TFSA.
The Law on TFSAs
The Income Tax Act (“ITA”) limits the contributions that a taxpayer may make to a TFSA. A taxpayer who exceeds their TFSA contribution limit is liable for tax on the excess amount.
In addition, a non-resident is liable for tax on contributions to a TFSA, subject to certain exceptions.
Under s. 207.06(1) of the ITA, the Minister has the discretion to waive or cancel all or part of a taxpayer’s liability arising from excess or non-resident TFSA contributions, if the taxpayer:
- establishes to the satisfaction of the Minister that the liability arose as a consequence of a reasonable error; and
- promptly withdraws the amount in respect of which the individual would otherwise be liable to pay the tax, together with the income reasonably attributable to that amount.
Taxpayer Contributes to TFSA as a Non-Resident
In 2009, the taxpayer contributed to her TFSA as a Canadian resident.
By letter dated June 1, 2010, the CRA notified the taxpayer that she had made an excess contribution. The CRA assessed tax of $33.81 on the excess contribution, which the taxpayer paid immediately.
In 2010, the taxpayer left Canada, and lived in a number of countries before moving to New York, where she continues to reside.
Between 2010 and 2018, shecontributed small amounts to her TFSA each year, except in 2014 when she contributed over $30,000. Before making the 2014 contribution, the taxpayer consulted her Canadian bank to ensure that she was eligible to contribute. The bank representative told her that while she was no longer a Canadian resident she could contribute to her TFSA.
In July 2018, the taxpayer learned that the bank representative had given her incorrect advice and she promptly emptied and closed her TFSA account. She called the CRA and was advised to submit a letter requesting a waiver.
The taxpayer sent a letter to the CRA requesting that the Minister waive liability on her excess and non-resident TFSA contributions for the 2010 to 2018 taxation years on the basis that the liability arose as a consequence of a reasonable error. Her initial request explained that she had been unaware that she could not contribute to her TFSA as a non-resident, and that she had been incorrectly advised by her bank representative that she could contribute as a non-resident.
The taxpayer’s initial request was denied. The decision explained that the taxpayer had continued to make excess TFSA contributions along with contributions as a non-resident from 2010 through 2017, after the CRA notified her about the TFSA excess contribution made in 2009. The CRA assessed $27,640 in tax, penalties and interest for her excess and non-resident TFSA contributions.
The taxpayer requested a second, independent review of her request for a waiver. The second request focused on the 2014 to 2017 taxation years: she submitted that her liability for the 2014 to 2017 taxation years arose as a consequence of a reasonable error. She also argued that the basis for the first decision was flawed, since the CRA’s 2010 letter addressed a matter that was unrelated to her liability for TFSA contributions as a non-resident and that she had promptly paid the amount indicated as owing by the CRA.
The taxpayer’s second request was also denied. In that decision, the CRA stated:
“We determined that we cannot grant a request to cancel the tax in your particular situation.
In your letter, you stated that your financial institution did not notify you that you could not contribute to a TFSA as a non-resident.
[Y]ou continued to make excess and non-resident contributions to your TFSA from 2010 – 2018, after you were notified by the Canada Revenue Agency about TFSA excess made in 2009 by letter that was issued to you June 1, 2010. We have to confirm that, after reviewing the documentation submitted and information available, there are no circumstances that would support the cancellation of the tax on excess and non-resident TFSA contributions.
It is the individual’s responsibility to educate themselves about the TFSA rules after being notified.”
The taxpayer applied to the Federal Court of Canada for a judicial review of the decision. She argued that the refusal to waive liability arising from her excess and non-resident TFSA contributions was unreasonable. She submitted that her liability for excess and non-resident contributions between 2010 and 2018 arose due to her non-resident status, and she did not “continue” to make excess and non-resident contributions to her TFSA after receiving the CRA’s 2010 letter. She further submitted that the decision was not transparent, intelligible or justified.
Federal Court Rules in Taxpayer’s Favour
The court agreed with the taxpayer’s argument that the decision to deny her request for relief was unreasonable, stating:
“The basis underlying the […] decision to deny [the taxpayer’s] request was that [she] 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. I note that [the taxpayer] could not have “continued” to make non-resident TFSA contributions since she was a Canadian resident in 2009. However, [the taxpayer] did not “continue” to make excess contributions.”
Ultimately, the court found that it was unreasonable to suggest that the taxpayer had continued to make excess contributions after being warned, because herexcess contribution in 2009 and her subsequent excess contributions had resulted from different errors.
As a result, the taxpayer’s application for judicial review was allowed.
Mark Feigenbaum brings together many years of litigation experience with a deep knowledge of tax law, corporate law, accounting, finance, and other related practice areas. Mark can help you avoid the biggest risks that may arise in tax disputes.
Prior to founding his law firm, Mark worked in the cross-border tax department of an international Big 4 firm, and held accounting management positions across a variety of sectors in both Canada and the United States.
With tax legislation in constant flux on both sides of the border, Mark takes great care to stay current on all relevant developments in law and policy. He carefully considers all solutions available to craft a response that proactively considers the policies and best practices of a given tax authority.
If you are involved in a tax dispute or related litigation, contact Mark Feigenbaum for exceptional representation and guidance. Mark’s many years of interdisciplinary knowledge in law, tax, accounting, and finance and significant cross-border experience make him uniquely positioned to assist you. Mark offers services to clients in the U.S., Canada and around the world. Contact Mark online or call him at (905) 695-1269 or toll-free at (877) 275-4792 to book a consultation.