Two taxpayers recently faced the Canada Revenue Agency (CRA) over their Tax-Free Savings Accounts (TFSAs), with one emerging victorious and the other suffering a defeat. These cases, decided in court this month, underscore common TFSA traps such as overcontributions and breaching the TFSA advantage rules.
The First Case: A Taxpayer's Success
A Quebec taxpayer opened a TFSA in 2015 and set up automatic monthly transfers of $350. He repeatedly contacted his bank to confirm he was within his contribution limit, receiving assurances each time. In June 2020, the CRA sent an email notification about a message in his My Account. However, the taxpayer could not access his account because it was blocked, requiring a phone call to unlock. He considered the email unimportant since he usually received CRA letters by mail and had not authorized electronic-only notices.
Despite several attempts to contact the CRA to unblock his account, the taxpayer was unsuccessful due to full-time work and reduced services during the COVID-19 pandemic. Consequently, he missed notices about overcontributions in 2020, 2021, and 2022, which resulted in a 1% monthly overcontribution tax. The CRA sent these assessments to his My Account with email notifications, but he remained unaware.
The taxpayer continued to receive annual tax refunds, albeit reduced by the overcontribution tax, and his accountant never flagged the issue. In May 2024, when he tried to withdraw funds for a home purchase, the CRA informed him of the overcontributions dating back to 2019. The court ultimately sided with the taxpayer, recognizing the CRA's failure to properly notify him and the taxpayer's diligent efforts to comply.
The Second Case: A Taxpayer's Loss
The second case involved a taxpayer who breached the TFSA advantage rules by engaging in frequent, short-term trading within the account. The CRA deemed this activity as carrying on a business, which is prohibited in a TFSA. The court upheld the CRA's assessment, ruling that the taxpayer's trading pattern constituted a business, resulting in the loss of tax-free status and significant penalties.
These cases highlight the importance of understanding TFSA rules. Overcontributions, even if accidental, can lead to penalties, while aggressive trading may trigger advantage rules. Taxpayers should monitor their contributions carefully and seek professional advice to avoid costly mistakes.
