Taxpayers’ ombudsman raps revenue agency

The Canada Revenue Agency should have done a better job of warning Canadians what would happen if they put too much money in their Tax-Free Savings Accounts, the country’s taxpayers’ ombudsman said in a report released Monday.

“While other government departments, the financial services sector, and the media publicized the benefits of the new tax-saving vehicle, the CRA should have been more proactive in informing Canadians about the tax consequences of the TFSA,” according to the report from ombudsman Paul Dubé.

Although information about the rules of withdrawals and re-contributions was available on the CRA website all along, it is clear that many Canadians simply didn’t know it was there, the report said.

“People knew about TFSAs but they didn’t necessarily know the tax implications of over-contributing or the finer details. The CRA as a source of information for these types of things is not always top of mind for taxpayers,” Dubé said in an interview.

“Many people said they just weren’t aware of those parts of the rules and they didn’t know where to go.”

The CRA said in a release that it “welcomes the Ombudsman's report as an opportunity to improve services to Canadians and has developed an action plan to address the recommendations identified in the report.”

The plan includes updated TFSA web pages, community newspaper articles, and Webinars to financial institutions to highlight important information that Canadians should know about their tax-free accounts.

Tax-Free Savings Accounts, known as TFSAs, were introduced in the 2008 federal budget and came into effect on Jan. 1, 2009.

About 4.8 million Canadians have opened a TFSA, the report noted.

Of those, 1.5 per cent, or nearly 73,000 Canadians received a letter in 2010 from the CRA about possible excess contributions.

Examining the role of other government departments or the financial services industry was beyond the scope of the review, Dubé noted.

“There was good communication with banking industry and training for CRA staff, but they should have gone a step further publicizing the tax consequences,” he said. “I don’t think the banking industry is responsible for making sure the tax consequences are followed or complied with.”

The ombudsman began its review in June 2010 to determine how well CRA served taxpayers and treated those who ran afoul of the rules.

Most people who broke the rules did so inadvertently, and in “genuine cases” of misunderstanding, tax resulting from over-contribution was waived, the report noted.

Under the rules, individuals can contribute a maximum of $5,000 per year and take the money out any time, tax-free. Money that is withdrawn can be put back into the TFSA, but only up to the limit of $5,000 for any given year.

For instance, if you put $5,000 into a tax-free account in each of 2009 and 2010, then later withdrew $3,000 for a trip that fell through, you would have to wait until 2011 to put the $3,000 back into the TFSA. If you re-contribute prior to that, you would face a 1 per cent per month tax on the excess amount.