In a recent decision, the Federal Court rejected a taxpayer’s application for judicial review after the Canada Revenue Agency (“CRA”) found that he had over-contributed to his Tax-Free Savings Account (“TFSA”).

Taxpayer Over-Contributes to TFSA

For the 2016 taxation year, the taxpayer’s TFSA contribution limit was $11,500. On August 12, 2016, he contributed $12,000.

However, the taxpayer’s TFSA was managed by a financial advisor at one of Canada’s chartered banks and, in or around 2016, the taxpayer lost $19,225 from his TFSA portfolio after a cease trade order was placed on a company whose shares the taxpayer held in his TFSA. The loss represented the reduction in the value of the shares. The company had gone bankrupt and was delisted from the relevant stock exchange. 

Subsequently, the taxpayer claimed that, at the end of 2016, the bank advised him that to replace the funds lost he could deposit $20,000 into his TFSA without paying tax. 

As a result, the taxpayer decided to make an additional $25,000 contribution to his TFSA on November 10, 2016, although the amount was $5,000 more than the bank’s alleged advice. 

On June 1, 2017, the CRA sent the taxpayer an educational letter advising him he had made excess contributions of $25,500 to his TFSA. The letter told him about the excess contributions tax and steps available for corrective action. The letter advised the taxpayer to “withdraw the excess amounts right away”, i.e. “immediately”. However, the taxpayer did not withdraw the excess contributions at that time. 

In fact, the taxpayer claimed he had never received the CRA letter. 

However, the taxpayer did withdraw $1,800 from his TFSA on June 8, 2017. He also then made additional contributions of $5,100 to his TFSA between January 18, 2018 and August 1, 2018.

On July 17, 2018, the CRA issued a Notice of Assessment regarding excess contributions in the amount of $12,700 with respect to the 2017 taxation year. It did so because the taxpayer had not substantially reduced the excess amount in the TFSA as required by the June 1, 2017 educational letter. 

On August 3, 2018 and on November 5, 2018, the taxpayer withdrew $5,116 and $2,000, respectively, from his TFSA.

On August 22, 2018, the taxpayer wrote to the CRA and requested a waiver of the tax imposed on excess TFSA contributions for the 2017 taxation year. He alleged that the excess contributions were made in error because of the bank’s advice that he was allowed to deposit the $20,000 which he had lost earlier.

In fact, s. 207.06(1) of the Income Tax Act (“ITA”) authorizes the Minister to waive such tax payable on two conditions: first, the excess contributions must have been made as a “consequence of a reasonable error”, and second, the taxpayer must remove the excess contributions “without delay”.

On February 13, 2019, the TFSA Processing Unit denied the taxpayer’s request for relief for the 2017 taxation year.

On March 4, 2019, the taxpayer requested a second level review regarding the 2017 taxation year; this review also denied his request. In that decision, the officer concluded the applicant had made excess contributions to his TFSA even after knowing he should not, as indicated in the educational letter. The officer concluded that the taxpayer had received the June 1, 2017 educational letter because: first, the letter had been sent to the same address listed on the taxpayer’s current file; second, the taxpayer had stated his preference for physical mail; and third, the letter had not come back as ‘returned to sender.’

Having decided the educational letter had been received by the taxpayer, the officer therefore determined there would be no cancellation of the excess contributions tax because the taxpayer had continued to maintain excess contributions despite having been notified of the excess, and having been told to withdraw it, which he did not do. 

The taxpayer appealed the officer’s decision to the Federal Court. 

Federal Court Rules Against Taxpayer

The court began by explaining that the second level officer’s decision was reviewable on a standard of reasonableness, as set out in the Supreme Court of Canada’s 2019 decision Canada (Minister of Citizenship and Immigration) v. Vavilov.

The court stated that the question was therefore whether the officer’s conclusion that the taxpayer had received the educational letter was reasonable. It then found:

“In my respectful view the Officer reasonably concluded the [taxpayer] received the Educational Letter. This is a pure question of fact, and of course the Officer is entitled to draw inferences in this connection as happened here.

Moreover, […] on judicial review I am instructed to take a respectful view of the Decision […], and when I do, I find support for the Officer. It was open on the facts in this case for the Officer to find the [taxpayer] received the June 1, 2017 Educational Letter. While she could have found otherwise on these facts, her finding of receipt is justified […]. This conclusion is transparent and intelligible – it flows from the facts found […]. The onus is on the [taxpayer] to show unreasonableness. On review of all the circumstances I am not persuaded to interfere with this finding.

The [taxpayer] also says it was unreasonable for the CRA not to advise him whether the Bank’s advice regarding topping up to cover reduction in share value was correct or incorrect. There is no merit in this argument which goes against the jurisprudence. The [taxpayer] must obtain his own tax advice. CRA is under no duty to provide legal or financial advice to the taxpayer in a case like this.”

Additionally, the court stated that merely receiving poor advice is insufficient to establish a reasonable error. The court also noted that, in any case, the taxpayer contributed more to his TFSA than the amount he alleged the bank had told him he could. Finally, the court stated: 

“I am sympathetic to the situation the [taxpayer] is in, if and to the extent he relied on unsound advice from the Bank. If that is the case however, his remedy may lie against the Bank, not the [CRA].”

As a result, the court rejected the taxpayer’s application for judicial review.

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Mark Feigenbaum brings together many years of litigation experience with a deep knowledge of tax law, corporate law, accounting, finance, and other related practice areas. Mark can help you avoid the biggest risks that may arise in tax disputes.

Prior to founding his law firm, Mark worked in the cross-border tax department of an international Big 4 firm, and held accounting management positions across a variety of sectors in both Canada and the United States.

With tax legislation in constant flux on both sides of the border, Mark takes great care to stay current on all relevant developments in law and policy. He carefully considers all solutions available to craft a response that proactively considers the policies and best practices of a given tax authority.

If you are involved in a tax dispute or related litigation, contact Mark Feigenbaum for exceptional representation and guidance. Mark’s many years of interdisciplinary knowledge in law, tax, accounting, and finance and significant cross-border experience make him uniquely positioned to assist you. Mark offers services to clients in the U.S., Canada and around the world. Contact Mark online or call him at (905) 695-1269 or toll-free at (877) 275-4792 to book a consultation.