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Income tax — waiver of TFSA penalty tax

My clients were a couple who had moved to China for eight years, but had continued to file Canadian tax returns and report their worldwide income during those years. When they returned to Canada, they sought my advice and I identified for them that, under the Canada-China tax treaty, they had become non-resident during the years they lived in China. I drafted a letter for their accountant to send to the CRA, requesting adjustments to their returns to treat them as non-resident for the years in question.

The CRA accepted the changes requested. However, the CRA then assessed my clients over $93,000 because they had contributed to their Tax-Free Savings Accounts (TFSAs) during the years they were in China. This amount dwarfed the other changes that resulted from their having identified as non-resident. It resulted from the "penalty tax" that applies to contributions in excess of those allowed (Income Tax Act section 207.02), plus a second "penalty tax" imposed on non-residents who contribute to a TFSA (section 207.03), plus penalties for not reporting this "penalty tax", plus interest.

I wrote a letter to the CRA on behalf of my clients, requesting waiver of all these taxes and penalties. I showed that, because my clients were unaware they were non-resident during the years in question, their TFSA contributions resulted from a "reasonable error". I also provided evidence that, once my clients were notified of the problem, they had withdrawn the excess contributions from their TFSAs "without delay", as required for such a waiver.

The CRA agreed, and two weeks later issued letters cancelling all of the penalty taxes, penalties and interest.

Problem solved!

(2020)