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The Canada Revenue Agency is quietly willing to consider providing relief for people who accidentally contributed too much to their Tax-Free Savings Accounts and now face penalties that could amount to hundreds of dollars.

Just over 70,000 people have received CRA notices telling them they owe penalty taxes because of overcontributions to their TFSAs. In large part, these cases involve simple misunderstandings of the limits on how much can be contributed to a plan each year.

Rule One: The most you can put in a TFSA annually is $5,000.

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Rule Two: In any calendar year, this limit applies even if you take money out of your account. Oblivious to these points, many people shunted money in and out of their TFSAs like they were savings accounts.

For example, someone might have put $5,000 in a TFSA early in 2009, taken out $4,000 at some point, then replaced it within a month or two rather than doing the right thing and waiting until the next year. The $4,000 repayment is considered an overcontribution in this case, and it's subject to a penalty of 1 per cent a month.

That's the letter of the law, anyway. In practice, CRA is saying that relief may be available for people who mistakenly overcontributed to a TFSA.


"Because we are reviewing each and every [situation]on a case-by-case basis, it's correct to say that relief may be provided," CRA spokeswoman Caitlin Workman said Wednesday. "Each case will be looked at with the facts at hand, so I'm a little wary of issuing a blanket statement. If it was truly an error - that's what we tend to look at."

People also got themselves into difficulties with CRA by withdrawing money from a tax-free account and then putting it in a TFSA at another financial institution. It's perfectly fine to do what's called a "direct transfer" of a TFSA from one firm to another, just as people commonly do with registered retirement savings plans. The problem lies in first withdrawing cash from a TFSA and then moving it to a new account in the same year.

Investor Education: TFSAs

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  • Note to Flaherty: TFSAs are good but they can be so much better
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  • The right way to use a Tax Free Savings Account
  • Learning from TFSA's rule book

The TFSA overcontribution mix-up is ironic when you consider that these accounts are so often described as being both simple and flexible. In the federal budget announcing the debut of these plans on Jan. 1, 2009, TFSAs were described as offering "full flexibility to withdraw and recontribute." Elsewhere, the budget documents said the TFSA "will also provide seniors with a savings vehicle to meet any ongoing savings needs."

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The big banks also have a role in the confusion, given that they held about 75 per cent of the $15.8-billion in TFSA assets at the end of last year. How is that tens of thousands of bank clients were breaking the overcontribution rules?

"As a new type of registered plan that is still in its early days, there's clearly been some confusion about the rules, which is regrettable … ," Kelly Hechler, a spokeswoman for Toronto-Dominion Bank said in an e-mail. "Although we informed and tested sales staff on the rules, including overcontribution, clearly all parties could have done a better job of explaining the rules in promoting this valuable tax savings vehicle."

More than 70,000 Canadians misunderstood rules, contributed more than allowed

Ms. Hechler said that for customers who mistakenly overcontributed to their TFSAs, TD is explaining how to apply for taxpayer relief. The bank is also taking steps to make sure that customers are aware of contribution rules in future.

Royal Bank of Canada said it has encouraged clients to consider the TFSA as an investment account for short- and long-term goals, not as a savings account.

"Our internal and external communications materials have been clear about the withdrawal rules and TFSA contribution room," the bank said in an e-mailed statement.

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Investors who miss the fine print on tax-free savings accounts can easily end up with an over-contribution

TFSA overcontribution penalties must be paid by June 30 or further charges will apply. If you're fighting a formal assessment saying you must pay a penalty, try an RC4288 Request for Taxpayer Relief form. It's worth noting that the legislation for TFSAs specifically mentions that these charges can be waived or cancelled if found to be due to a reasonable error.

"That's important because in a lot of areas, CRA doesn't have the discretion to waive penalties," said Ryan Keey, a chartered account who writes for a tax information service published by Thomson Reuters.

Mr. Keey said his wife's sister has received notice of a TFSA overcontribution penalty. He suggested she pay the penalty to avoid any further charges, and then write a letter making a case to have it refunded.

Gordon Pape answers your questions here:

<iframe src="" scrolling="no" height="650px" width="600px" frameBorder ="0" allowTransparency="true" ><a href="" >Got a TFSA question?</a></iframe>

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Five rules for smart TFSA management

1 Do some research before opening a Tax-Free Savings Account

While you're allowed to directly transfer money between TFSA accounts at different firms, you can get into difficulties if you take money out and then shift it somewhere else. Avoid hassles by finding a TFSA account that's right for you and then sticking with it.

2 Note the different kinds of accounts

If you want complete flexibility to put investments in a TFSA, go for a self-directed account at a brokerage firm or through an investment adviser. Banks also sell TFSAs based on mutual funds and high-interest savings accounts.

3 Be rate savvy

Some people have opened TFSAs with banks offering teaser rates, then been disappointed when the rates declined or became uncompetitive.

4 Limit withdrawals

TFSAs are not like savings accounts that let you move money in and out at will. Use them for money you don't anticipate needing in the immediate future.

5 Ask for help

The mix-up with TFSA overcontributions shows these accounts are more complex than many people realized. If you're not certain about how they work, consult an expert for guidance before you act.

Rob Carrick and Dianne Nice

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About the Author
Personal Finance Columnist

Rob Carrick has been writing about personal finance, business and economics for close to 20 years. He joined The Globe and Mail in late 1996 as an investment reporter and has been personal finance columnist since November 1998.Rob's personal finance columns appear in The Globe on Tuesday and Thursday, and his Portfolio Strategy column for investors appears on Saturday. More

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