Tax-Free Savings Account Penalties May Be Waived

Approximately 4.7 million Canadians opened Tax-Free Savings Accounts since they were introduced, and about 70,000 of those account holders have been asked to provide additional information on their accounts to CRA. The government is recognizing that there was some general confusion regarding the TFSA rules by account holders as well as the financial institutions holding the accounts. A recent news release from the Department of Finance advised that the deadline for responding to TFSA letters received from CRA has now been extended from June 30th to August 3rd.

Available since January 1, 2009, the Tax-Free Savings Account (TFSA) is a registered account in which investment earnings, including interest, dividends and capital gains accumulate within the account on a tax free basis. Contributions up to an annual maximum of $5000 can be made by/for those who have reached 18 years of age and are residents of Canada. There is no maximum contribution age (you can be 92, for example!), however a tax return must be filed to build "TFSA Contribution Roomî. This $5000 annual maximum amount will be indexed after 2009, with rounding to the nearest $500. The annual maximum remains at $5,000 for 2010 contributions.

In the news release, the Government of Canada announced that for 2009, the first year of the program, there will be a case-by-case review to determine if tax will be waived on excess contributions that occurred during the year. In many cases, over contributions were occurring in situations when individuals were using the TFSA accounts as an ATM, i.e. depositing and withdrawing amounts frequently, and in other cases transferring TFSA amounts from one institution to another. These over contributions can result in penalties, and require the account holder to complete a form advising the CRA of the amounts for each month that an over-contribution was made during the year.

RC243 Tax-Free Savings Account (TFSA) Return 2009

RC243-SCH-A Schedule A - Excess TFSA Amounts

RC243-SCH-B Schedule B - Non-Resident Contributions to a Tax Free Savings Account (TFSA)

Educational resources:For more information on tax planning provisions and compliance requirements, subscribe to The Knowledge Bureau's online tax reference for taxpayers, financial advisors and their clients: EverGreen Explanatory Notes.

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