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One of the easiest ways to stay on top of your tax-free savings account (TFSA) contribution limit and avoid an overcontribution penalty is to double-check your limit online, which can be easily done by logging on to Canada Revenue Agency’s online portal for individuals called My Account.

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There are a couple things to keep in mind. First, know that your TFSA contribution and withdrawal information is not updated in real time and may be out of date. Check the “as of” date posted online along with your TFSA room.

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Second, pay close attention to the number shown on the screen, especially if the amount is in brackets, meaning you have a “negative contribution limit,” which can happen if you have overcontributed in a prior calendar year. A case decided earlier in June involved a taxpayer who claimed to be confused by this bracketed amount, ran afoul of his TFSA limit and went to court to get a judge to order the CRA to reconsider his case.

Before delving into the case, let’s briefly review the rules. You can contribute $6,500 to your TFSA for 2023, and, depending on your age, your limit could be as high as $88,000 if you’ve never made a TFSA contribution before and you have been a resident of Canada since 2009, since unused room automatically carries forward from one calendar year to the next. You can also recontribute any TFSA withdrawals back into your TFSA, beginning the calendar year following the year of withdrawal.

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If you accidentally contribute to your TFSA beyond your maximum, you can get hit with an overcontribution penalty tax that is equal to one per cent per month for each month you’re over your limit. If you get assessed this tax, you can ask the CRA to waive or cancel it, which it has the power to do if it can be established the tax arose “as a consequence of a reasonable error” and the overcontribution is withdrawn from the TFSA “without delay.” If the CRA refuses to cancel the tax, you can take the matter to federal court, where a judge will determine whether the CRA’s decision not to waive the tax was reasonable.

In this recent case, the taxpayer began contributing to his TFSA in 2014. He overcontributed in 2015 and, as a result, the CRA in May 2016 sent him an “education letter” notifying him of his overcontribution, and telling him to withdraw the excess contribution “immediately” to avoid the penalty tax.

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Fast forward to 2021 when the taxpayer once again overcontributed to his TFSA. In July 2022, the CRA notified him of his overcontribution by way of a Notice of Assessment, charging him with an overcontribution tax of $2,570.60, plus a penalty of $128.53, along with arrears interest.

The taxpayer subsequently requested to have the tax and penalties cancelled. The taxpayer explained he had consulted his profile on the CRA’s website, which identified his TFSA contribution room as “($18,459.99).” The taxpayer explained he interpreted this information to mean he had $18,459.99 in available TFSA contribution room, “not realizing that the brackets around that figure indicated that he actually had a negative contribution limit, as a result of previous overcontribution.” He told the CRA agent he was taking steps to remove the excess amount.

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In August 2022, the CRA denied his first request to cancel the tax, explaining that his circumstances “did not constitute a reasonable error.” The CRA said the taxpayer had already received an education letter in 2016 due to a previous TFSA overcontribution, and it was the taxpayer’s responsibility to withdraw any excess contributions and “to keep and review accurate records to ensure” he remains within his TFSA contribution room.

The following month, the taxpayer requested a second independent review by a different CRA officer. In his letter to the CRA, he said he shouldn’t be blamed for his overcontribution as he “was not aware that a contribution limit displayed in brackets signifies a negative amount (i.e., an excess) and that, upon learning of his overcontribution, he promptly removed the excess amount from his TFSA account.”

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The taxpayer also said that when he called the CRA to resolve the issue, the CRA agent admitted that nowhere in the TFSA contribution room section does it state that a value in brackets means a negative number. He also said he couldn’t recall his 2015 TFSA overcontribution, saying “it must have been a mistake, because he is an honest taxpayer.”

The CRA again denied the taxpayer’s request, so the taxpayer took the matter to Federal Court to ask a judge to determine whether the CRA officer’s refusal to exercise their discretion and cancel the overcontribution tax was “reasonable.”

The CRA officer acknowledged the taxpayer’s request for relief resulted from him not understanding the meaning of the brackets around the amount shown on the CRA website. Nonetheless, the officer noted “it is the responsibility of each TFSA account holder to be aware of the rules and regulations governing TFSAs and to manage their TFSA accordingly, including understanding that the use of brackets represents negative contribution room.”

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The judge had no doubt that the taxpayer was acting honestly and his overcontribution was based on a “genuine misunderstanding” as to how much TFSA contribution room he had. But, ultimately, a taxpayer’s contribution room, and whether they are in an overcontribution position, is a function of contributions and withdrawals made by that taxpayer. It’s not dependent on whether a taxpayer understands the information on a website.

Since the taxpayer’s contribution information is “within the knowledge, or the means of knowledge, of the taxpayer,” the judge concluded the CRA’s reasoning in denying the taxpayer’s request for relief was “intelligible” and reasonable, and dismissed the taxpayer’s application for judicial review.

Jamie Golombek, CPA, CA, CFP, CLU, TEP, is the managing director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com.

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