A couple years ago, one of my blog colleagues wrote on the residency rules regarding tax free saving accounts (TFSA’s). Generally, as an owner of TFSA, if you leave Canada, the accumulated funds may remain in the TFSA without Canadian tax consequences. You can’t make any further contributions but you can make withdrawals. The penalties for not abiding by the non-residency contribution rules are severe – essentially 1% per month for each month after non-resident contributions are made until the excess contribution is withdrawn or the date non-resident becomes a Canadian tax resident, whichever is the earliest. You also run the risk of incurring equivalent (and additional) penalties for over-contributions (in excess of contribution room availability).
I have been consulted on this issue on a number of occasions and what I find typically is the taxpayer (who was often headed out of the country for a short term contract and planning to return to Canada at some point ) had relied on inadequate advice from a 3rd party, often from a financial advisor who was not aware of the non-residency rules and encouraged the taxpayer to continue to make contributions while non -resident.
There has been a recent development on this issue. The Federal Court of Canada (Ifi vs Canada (Attorney General)2020 FC 1150) was asked to perform a judicial review in a case where the Canada Revenue Agency (“CRA) denied relief of tax penalties on non-resident and over contributions while the taxpayer was a non-resident.
In 2009, the taxpayer over contributed to her TFSA and upon notification from the CRA, she paid a small of amount of tax as a result. In 2010, she emigrated from Canada and continued to contribute to her TFSA including a significant contribution in 2014 , apparently on the advice of her bank representative. In 2018, she learned that she was incorrectly advised, emptied and closed her TFSA, and requested that the CRA waive her penalties. All requests to the CRA were denied.
The Court found for the taxpayer because in the Court’s opinion, the denial was not reasonable. The CRA based the denial on the letter it issued in 2009 regarding the over-contributions as a basis for denying her relief for the penalties imposed on contributions made as a non-resident. This was a different error (and not necessarily an unreasonable one in the Court’s opinion) and the matter was returned the CRA for a redetermination.
There is a process for requesting waiver of taxes on excess TFSA contributions on the CRA website. While the CRA is not obligated to legally to waive the penalties, it has the discretion to waive penalties if in its opinion, it resulted as a consequence of a reasonable error and action was taken immediately to correct the matter. Hopefully this Court case can be used to help some taxpayers thru this process.
Happy Reading and stay safe.