Principal Issues: 1. How can a taxpayer reduce an excess TFSA amount where the value of all of the taxpayer's TFSAs are zero? 2. Will the Minister consider waiving or cancelling the 1% tax under subsection 207.06(1)?
Position: 1. Only new TFSA contribution room that becomes available to the taxpayer in future years will serve to reduce the excess TFSA amount. 2. No.
Reasons: 1. The taxpayer is unable to withdraw any amounts from their TFSAs therefore the taxpayer would be unable to reduce the excess TFSA amount in this manner. 2. The taxpayer is unable to withdraw any amounts from their TFSAs so the conditions of subsection 207.06(1) would not be met and the Minister would have no ability to waive or cancel the tax.
2021 STEP CRA Roundtable – June 15, 2021
QUESTION 11. TFSA Over-contribution
A taxpayer moves to Canada in 2021 and opens a TFSA soon afterwards. Because he was previously non-resident, the taxpayer’s TFSA contribution room for 2021 is only $6,000. Due to a misunderstanding of the TFSA rules, the taxpayer contributes $18,000 to his TFSA and invests it all in shares of one company. Before he has a chance to withdraw the $12,000 over-contribution, the company goes bankrupt and the value of the TFSA goes to zero.
How can the taxpayer stop the TFSA over-contribution tax or request a waiver of the tax under subsection 207.06(1) if he can no longer withdraw the over-contribution? Does he need to wait two years for new TFSA contribution room to open up?
CRA Response
Section 207.02 provides that an individual who makes a contribution to a TFSA that exceeds their contribution room is subject to a 1% tax on the excess TFSA amount. The tax is calculated monthly based on the individual’s highest excess TFSA amount for that month. The 1% tax continues to apply for each month that the excess TFSA amount remains. Generally, an individual may take action to correct an over-contribution and minimize the tax by making one or more withdrawals from their TFSA to reduce or eliminate the excess TFSA amount. However, in this case, the individual is unable to withdraw any amounts from their TFSA and therefore the individual would be unable to mitigate the tax in this manner. Only new TFSA contribution room that becomes available to the individual in future years will serve to reduce the excess TFSA amount.
One of the conditions that must be met for the Minister to waive or cancel the 1% tax pursuant to subsection 207.06(1) is that the individual withdraw from their TFSA an amount sufficient to eliminate the excess TFSA amount, together with any associated income and capital gains. Again, in this case, the individual is unable to withdraw any amounts from their TFSA and therefore the Minister would have no authority to waive or cancel the tax.
Assuming that the individual makes no additional TFSA contributions in 2021, 2022 and 2023 and that TFSA dollar limit for each of 2022 and 2023 remains at $6,000, the excess TFSA amount would be reduced to $6,000 as at January 1, 2022 and fully eliminated as at January 1, 2023. As a result, the individual would be liable for the 1% tax in 2021 and 2022 and would need to complete Form RC243 Tax-Free Savings Account (TFSA) Return and remit the tax for each year. The individual could begin making TFSA contributions in 2024.
W. Doiron
2021-088322