Ottawa Tax: Ottawa extends deadline on TFSA penalty tax
Two senior ministers have confirmed that Canada's taxperson has a heart.
Revenue Minister Keith Ashfield and Finance Minister Jim Flaherty have extended until Aug. 3 the deadline for 70,000 taxpayers to plead ignorance of the rules for tax-free savings accounts.
They have also promised leniency, up to a point.
"Our government recognizes that there was some genuine confusion about the rules for the TFSA in the first year," they acknowledged Friday in a statement. "It may take time for some Canadians to learn about the program and for some financial institutions to properly inform their clients about this product."
Thousands of the 4.7 million taxpayers who have opened TFSAs since Jan. 1, 2009, were faced with a tax of 1 per cent a month on excess contributions. This would have severely reduced or eliminated any potential investment gain for the year.
Most taxpayers who complained to financial columnists about receiving notices of the tax said they did not contribute more than their $5,000 annual TFSA limit. But they had closed one account and opened another without applying for a transfer, or they had moved money in and out of the same account without waiting until the next calendar as required.
These taxpayers initially given until Wednesday to obtain and complete a detailed and rather scary information form called RC243-SCH-A. But a form was not included with each notice. Taxpayers were directed to use the CRA website or call the agency to get one.
Flaherty and Ashfield have not gone so far as to spare them from completing the form, or from writing and attaching a letter to explain what mistake they made.
The ministers did, however, assure taxpayers "we have taken the decision to be as flexible as possible in cases where a genuine misunderstanding of the TFSA contribution rules occurred."
"For instance, individuals who used their TFSA as a regular banking account in 2009, making deposits and withdrawals on a frequent basis, or who have transferred funds between TFSAs at different institutions, but whose net contributions never exceeded the 2009 limit of $5,000, may not be required to pay the tax on excess contributions for this year."
"Our intention is to review each situation on a case-by-case basis and, where appropriate, waive taxes on excess contributions for this year."
The amendment to the Income Tax Act that permitted the new tax-free accounts gave tax officials authority to waive or cancel the tax on excess contributions where it was consider "just and equitable."
Peter Aceto, CEO of ING Direct, said "it's a shame the process couldn't have been a little bit easier, but at least they are trying... We are quite pleased that the government has decided to show leniency to help Canadians who may have misunderstand the rules regarding this new was to save."
Here are the instructions for avoiding the tax if you received a letter from CRA:
1. Obtain and complete form RC243-SCH-A. Attach a letter to explain what you did wrong, such as closing one account and opening another or depositing money you had previously withdrawn. Attach a cheque for the tax you might owe, but hope to get back. Promise to remove any excess contributions right away.
2. By Aug. 3, mail everything in the return envelope that should have come with your notice from CRA. If you threw that one out, use another enveloped addressed to the tax office where you would normally mail your tax return. Mention TFSA Excess Amounts.
3. If your explanation is not accepted, and you later receive a formal notice of assessment, then submit a "request for taxpayer relief" form or submit a formal notice of objection.
4. If you have other questions about your TFSA, contact the CRA at 1-800-959-8281 or visit www.cra-arc.gc.ca.
Tax loss carryback: On a completely different subject, the Canada Revenue Agency has admitted a computer glitch during May, and it deprived certain investors of tax refunds. The taxpayers wanted to use their 2009 investment losses to offset capital gains earned in one or more of the previous three years.
Canada Revenue Agency (CRA) says the system problem was been corrected. "We are now in the process of identifying all affected taxpayers in order to correct their accounts and issue new notices reflecting the correct information. Some cases will require that we contact the taxpayer to confirm the correct information before the reassessment can be completed."