CRA Responds To Critical Ombudsman Report

by Mike Godfrey, Tax-News.com, Washington

26 August 2011

In response to a critical report slamming the complexities of Canada's Tax-Free Savings Account regime the government has pledged to be as flexible as possible in cases where a misunderstanding of account rules has occurred.

Canada's Taxpayers' Ombudsman, J. Paul Dubé, released his "Knowing the Rules" report earlier this month, highlighting the confusion felt by many over the rules governing the TFSA. Under the current rules, Canadians can save up to CAD5,000 per year in a TFSA and make withdrawals throughout the year, without facing a tax charge. The withdrawn money can be put back into the account, but only up to the CAD5,000 limit. This, the report says, has caused confusion, with 72,786 (1.5%) of the 4.8m who opened a TFSA in 2010 receiving a letter from the CRA about possible excess contributions.

In response, the Canada Revenue Agency (CRA), criticized for failing to actively inform the public of the tax consequences involved in TFSAs, has said that it is continuing in its work to increase awareness of TFSA guidelines among Canadians and financial institutions. According to its figures, of the 6.7m possessing a TFSA, over 98% have managed the account in accordance with the guidelines. In addition, it expects to send less than 1.5% of account holders a letter asking for further information about their accounts.

Nonetheless, the CRA has admitted that the government recognizes that some genuine confusion over the rules in the TSFA's initial operating years will naturally occur. As a result, the CRA has stressed that it will continue to build on existing communications and work with financial institutions to ensure that Canadians have access to all available information.

The CRA has also confirmed that, for the 2010 filing year (the second year of the TFSA programme), it will be as flexible as possible in cases where a genuine misunderstanding of the TFSA contribution rules has occurred. Every TFSA holder who receives a letter indicating that they may have over-contributed will be able to ask the CRA to review their specific file and, where appropriate, waive taxes on excess contributions for 2010.

This commitment follows on from the pledge made by Gail Shea, the Minister of National Revenue, that the CRA "will ensure the Ombudsman’s recommendations continue to be implemented to further increase awareness of TFSA rules among Canadians so they may continue to enjoy the benefits of this increasingly popular investment vehicle.”

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