Over-contributed to your TFSA? We asked CRA to make a one-time adjustment for this client

Case Overview:

A client retained Rotfleisch & Samulovitch to handle his TFSA related issue outstanding since 2016. The client had mistakenly overcontributed to his TFSA account and subsequently suffered significant losses in his TFSA investment account. As a result, the balance in his TFSA went down so much that the client had insufficient funds to withdraw the full excess contribution amount from his TFSA account. Further, the client has previously submitted a TFSA waiver request on his own, which was rejected by the Canada Revenue Agency. Due to the negative TFSA contribution room limit, the client continued to accrue interest and had no way to resolve the issue.

The Problem

The law A taxpayer’s TFSA contribution room is the maximum amount that a taxpayer can contribute to his or her TFSA account(s). Once the contribution room is used, withdrawals, excluding qualifying transfers and specified distributions, do not reverse the used contribution room. At any time in the year, if a taxpayer contributes more than his or her available TFSA contribution room, the taxpayer will have to pay a tax equal to 1% of the highest excess TFSA amount in the month, for each month that the excess amount stays in the taxpayer’s TFSA account(s).

A taxpayer is required to withdraw any excess contribution from his or her TFSA account(s) as soon as the taxpayer becomes aware of the issue, in order to qualify for relief via a TFSA waiver request. Other conditions must also be met for the relief to be granted by the CRA.

However, in the event that a taxpayer cannot withdraw the full amount of excess TFSA contribution due to investment loss, a taxpayer remains liable for the 1% tax of the highest excess TFSA amount in the month.

Normally, CRA takes the position that “only new TFSA contribution room that becomes available to the individual in future years will serve to reduce the excess TFSA amount.”

Our Approach:

We prepared and submitted a detailed second TFSA waiver request, including requesting a special one-time contribution room limit adjustment, asking the Canada Revenue Agency to allow an adjustment to the client’s TFSA contribution room limit, due to the client’s inability to remove the full amount of excess TFSA contribution. This is not an option set out or recognized by CRA. However, we made forceful arguments about the client being that it would be unfair to continue to penalize and charge the client a monthly tax indefinitely. As TFSA waiver request generally take several months to be processed, we actively followed up with the Canada Revenue Agency to have the client’s TFSA issue resolved as soon as possible.

The Result:

The client’s TFSA contribution room limit was adjusted to nil from -$125,561.91, once the TFSA waiver request has been accepted by the Canada Revenue Agency, saving the client over $4,000 in payable taxes and preventing any further monthly interest and penalties. The client also remained entitled to the annual increase of TFSA contribution room limit.