The taxpayer then turned to the Federal Court asking for a judicial review of the CRA’s decision. In a judicial review, a judge is tasked with determining whether the CRA’s decision was “rational and logical.” “(It) must bear the hallmarks of reasonableness — justification, transparency and intelligibility.”
The taxpayer’s main argument was that due to several “ambiguities,” he should not be hit with the penalty tax. He claimed that the drop in TFSA limits from $10,000 (in 2015) to $5,500 (2016) in a single year created ambiguity. He added this was compounded by the fact that the CRA no longer states TFSA contribution room on annual notices of assessment for tax returns.
He argued that he wasn’t “properly notified” of his overcontribution until “years later,” adding that something important like the education letter alerting him to the overpayment should not have been by email, given that when CRA “wanted their money” they then provided him the letter in writing. Had he received the educational letter sent by email, he would have withdrawn the money then and not been subject to the penalty, he argued.
Finally, he maintained that he has not “in any way damaged the Canadian Treasury,” and that he has not benefitted from the overcontribution as he has suffered a $13,000 loss on the account. “The nature of the TFSA is stated as an instrument to aid and assist Canadians to save money, and this penalty does not forward that stated goal.”
At trial, the CRA argued that “honest mistakes do not absolve ignorance of the law” and cited a prior TFSA overcontribution case about a Canadian Forces member who did not receive correspondence from the CRA and was nevertheless assessed overcontribution tax, which was upheld. Because the taxpayer in the current case signed up for online mail, “it was his responsibility to ensure he was checking his correspondences, and that it is irrelevant that the CRA stopped putting limits on notices of assessment…(K)eeping track of changes to his CRA account and TFSA contribution levels… must be seen as his responsibility, and not that of the CRA.”
The judge was sympathetic, calling the taxpayer’s situation “very unfortunate” and the result of “a genuine mistake.” That being said, “(the taxpayer’s) mistake, both in overcontributing to his TFSA, and then in not monitoring his communications, should not be transferred to the CRA.” The judge ruled that the CRA’s decision to deny relief was “reasonable, justified, transparent and intelligible.”
As the judge wrote, “Our Canadian system of taxation is on a self-reporting basis. For this reason, the onus is on the taxpayer to declare and be aware of all their taxation limits and assessments.”
In a minor victory for the investor, the judge refused the CRA’s request to be awarded costs in the case.
Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth Management in Toronto.