Two years after its creation, the Tax Free Savings Account (TFSA) has made a number of people unhappy. As a result, J. Paul Dubé, the Taxpayers’ Ombudsman, has turned his attention to this savings vehicle. In a report called “Knowing the Rules”, released on Aug. 8, he argues that the rules governing the TFSA have led to confusion.According to taxpayer complaints, the rules dealing with withdrawals and excess contributions are baffling. The TFSA rules state that individuals may contribute a maximum of $5000 per year and withdraw money at any time, tax-free. The rules also allow them to pay funds back into the account, but only up to $5000 in a given year.
However, Mr. Dubé reports that many taxpayers have failed to understand the regulations. As a result, of the 4.8 million Canadians who have opened a TFSA, 72,786 of them (1.5%) received a letter from the Canada Revenue Agency (CRA) in 2010 warning of possible excess contributions. Investors have had to pay penalties, and Mr. Dubé notes that some deliberately contributed more than was allowed.
He pointed out another issue, namely that Canadians who wanted to obtain advice and information from the CRA contacted the agency by telephone but that the quality, accuracy and consistency of information depended greatly on the training and information provided to CRA officials.
While Mr. Dubé believes that the CRA has taken steps to better inform Canadians, he suggests that it intensify its efforts on three fronts. He invites the agency to release the advice that it has given about the TFSA. In his opinion, the agency must continue to update the available information on the savings account. He also believes the CRA should be proactive when it informs Canadians about the tax rules that govern it. Finally, Mr. Dubé suggests that the CRA continue to work with the financial services industry, which he also recommends make its TFSA information publicly available.