Apply for waiver of TFSA over-contribution penalties

The Government has decided to provide relief to taxpayers whose net TFSA contributions never exceeded $5,000 in 2009. The deadline for responding to the TFSA return letter from the CRA is August 3, 2010. You are asked to respond to the CRA letter by providing additional information or explanations that you may have in respect of your over-contributions. Details here.

If you are one of the reportedly more than 70,000 or so tax payers who has been penalized by the CRA for excess TFSA contributions and the error arose as a consequence of a reasonable error and are looking for relief, I urge you to read Rob Carrick’s column in the Globe and Mail today (See Confusion over TFSA rules leads to costly penalties for some investors):

Accidentally contributed more than $5,000 to a TFSA? It may still be possible to avoid penalties for over-contributions. Paul Hickey, partner at KPMG’s national tax centre, suggested using CRA’s tax fairness provisions by submitting a Request For Taxpayer Relief form.

“Interestingly the TFSA provisions contain a special rule which allows the CRA to waive or cancel all or part of the penalty if you can establish “to the satisfaction of the Minister that the liability arose as a consequence of a reasonable error,” and that the individual acts without delay to fix the problem,” Mr. Hickey said in an e-mail.

Here are the specific provisions in the TFSA legislation that would allow taxpayers to request a waiver of tax payable:

Tax payable on excess TFSA amount

207.02

If, at any time in a calendar month, an individual has an excess TFSA amount, the individual shall, in respect of that month, pay a tax under this Part equal to 1% of the highest such amount in that month.

Waiver of tax payable

207.06

(1) If an individual would otherwise be liable to pay a tax under this Part because of section 207.02 or 207.03, the Minister may waive or cancel all or part of the liability if

(a) the individual establishes to the satisfaction of the Minister that the liability arose as a consequence of a reasonable error; and

(b) the individual acts without delay to cause one or more distributions to be made, under one or more TFSAs, the total amount of which is not less than the amount in respect of which the individual would otherwise be liable to pay the tax.

Also see Money Smarts Blog’s post on this topic.

How to apply

I should note here that I’m not a tax professional or accountant but here’s how I’d apply for a excess TFSA amount penalty waiver.

Fill out the form Schedule A, Excess TFSA Amounts (Form RC243-Sch-A) and attach a cheque for the TFSA penalty amount. Mail it in to the nearest tax centre before June 30, 2010.
File a Request for Taxpayer Relief (Form RC 4288). Ask for a waiver under 207.06 of the Income Tax Act. Show how the penalty arose as a result of a “reasonable error” AND the steps you have taken to rectify it (by removing the excess amounts). Mail it in to your nearest tax centre.

Rob Carrick writes in the Globe and Mail that the CRA may provide relief on a case-by-case basis.

James Daw in The Star (Don’t panic! Appeal penalty tax on tax-free savings) has a step-by-step process to apply for a waiver of TFSA excess amount penalties.

Related Reading:

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