A recent article in the Financial Post highlights the risks in overcontributing to a TFSA and the consequences. In the scenario the taxpayer withdrew >$600K from a line of credit and invested it into the stock market in 2020 and held the equities in his TFSA. What he didn’t understand is that there is an annual and cumulative limit for deposit into a TFSA. He overcontributed by nearly $600K and was assessed interest on the overcontribution to the tune of >$6K for one month of overcontribution. At the time he was advised to immediately remove the overcontribution amount but declined because the equities he had purchased had declined in value by 35% since his purchase. The taxpayer then appealed the interest on the basis that he was in poor financial condition. The CRA declined to cancel the interest as the taxpayer had not removed the excess contribution. The taxpayer appealed again for a higher level review and was again denied cancellation of the interest as he had still not removed the excess contribution. The taxpayer then appealed to the Federal Court. The judge considered the facts of the situation to determine the correctness of the CRA’s denial of the taxpayer’s request to cancel the interest assessed. From the article:

“As in prior cases, a reasonable decision is one that is “based on an internally coherent and rational chain of analysis and that is justified in relation to the facts and law that constrain the decision maker.” Generally, a CRA decision is not set aside unless it contains “sufficiently serious shortcomings … such that it cannot be said to exhibit the requisite degree of justification, intelligibility and transparency.”

Upon reviewing the facts of the case, the judge found it “questionable” whether the taxpayer’s significant overcontribution was the result of a reasonable error since the taxpayer made no enquiries as to how TFSAs worked before making a very significant overcontribution. The judge also said that even if it was a reasonable error, the taxpayer chose not to withdraw his overcontribution when he was first notified of it by the CRA, thus failing to meet the requirement to do so “without delay.”

The judge cited a prior case that noted “the CRA is not responsible for the nature of the investments made by (a taxpayer) in his TFSA. He alone bears that risk. (The taxpayer) has decided to avoid economic loss in his TFSA but in doing so cannot then seek discretionary relief from the tax imposed on his excess amount.”

As a result, the judge concluded the CRA’s decision to deny relief was reasonable, as was its explanation and justification for doing so. The judge saw no reason to intervene.”

If prior TFSA overcontribution cases are any indication, the CRA will generally waive the penalties and interest for a first violation, but only if the person immediately removes the overcontribution. Where the person doesn’t, the CRA is unlikely to waive the penalties and interest because the person has not taken the most obvious step in correcting the overcontribution.