No penalties for confusion over tax-free accounts

Canadians who mistakenly put too much into their new tax-free savings accounts are being given a break no penalties.

The federal government said it won't penalize individuals who inadvertently contributed more than the $5,000 annual limit in 2009, the first year of the program.

"Our government recognizes that there was some genuine confusion about the rules for the TFSA in the first year," said a statement released by the finance and revenue ministers.

"The first year of the program, we have taken the decision to be as flexible as possible in cases where a genuine misunderstanding of the TFSA contribution rules occurred."

Apparently many Canadians treated the program like an ordinary bank account, taking money out and putting it back in, thinking that as long as the account did not exceed $5,000 for the year, they were within the rules.

They were mistaken. While account holders can withdraw funds as they wish, they cannot re-invest what they take out until the following year if that pushes total annual contributions above $5,000 in any single year.

An official with Revenue Canada said about 70,000 Canadians were notified in June that their total contributions exceeded the limit, and that they would be assessed a one per cent penalty on over-contributions each month.

Those issued letters represent only about two per cent of the about 4.7 million Canadians who have opened a tax-free savings account since the program started in 2009.

The popular program allows individuals to invest a maximum of $5,000 a year into a special account, with future profits free of taxation.

Revenue Canada said Canadians who have received a letter about their over-investment should respond with an explanation.

The agency said if it receives no response, a notice of assessment will be issued, at which point account holders should file a request for relief or a formal notice of objection.