Too Much Confusion Over Canadian Tax Free Savings Accounts

by Mike Godfrey, Tax-News.com, Washington

10 August 2011

Canadian taxpayers have fallen foul of the rules surrounding Tax Free Savings Accounts (TFSA), with the Canadian Revenue Agency (CRA) failing to actively inform the public of the tax consequences involved, according to a new report.

The "Knowing the Rules" report, released by J. Paul Dubé, the Taxpayers' Ombudsman, addresses the confusion that arose 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 The withdrawn money can be put back into the account, but only up to the CAD5,000 limit.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.

The report says that the Ombudsman took notice of numerous media reports on the difficulties faced by those in that situation, and that complaints were received about penalties imposed for over-contribution and the confusing nature of the rules on withdrawals and over-contributions. Allegedly, the information available was not sufficiently clear enough, leading to customers making mistakes. While there have been numerous changes to the training of CRA agents, updating them and allowing access to taxpayers' accounts through a new computer system, the quality, accuracy and consistency of telephone advice and information was variable.

In conclusion, the Ombudsman writes that since the TFSA is not a simple savings account, Canadians need to know and understand its tax consequences. While sufficient information is readily available on the CRA website, the Ombudsman questions why, despite such information, so many taxpayers misunderstood the rules. It appears that many were unaware of the availability of the information online. The argument is made that the CRA has the responsibility to anticipate, to some degree, the challenges taxpayers would face in dealing with a new tax programme.

Therefore, the CRA should have been more proactive in informing the public, with its lack of activity in contrast to the publicity generated by other government departments, the financial services sector and the media. The report stresses that Canadians rely on the CRA for information on tax obligations and entitlements, meaning that the CRA ought to take steps to inform the public where to find it.

Responding to the findings, Gail Shea, Minister of National Revenue, said: “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.” In reaction to the report, the CRA has created an action plan designed to address the recommendations made. The plan includes the updating of TFSA webpages, the issuance of relevant Tax Tips, community newspaper articles, and Webinars to financial institutions.

During the recent election, Prime Minister Stephen Harper pledged to double the cap on the TFSA to CAD10,000. However, no further information has been released on the government's intentions, and it is not yet clear when the changes will be made.

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