Questrade the CRA and the Double TFSA 2011 Contribution Confusion

At the beginning of March 2013 a person posted to RedFlagDeals that they had received a letter from the Canada Revenue Agency advising them that they had contributed too much to their TFSA in 2011 and that they owed a large fine to the tax department. The investor knew they had not over contributed and started immediately checking into the problem. The error was made by Questrade. Apparently, due to a computer system change, some contributions were reported twice to the CRA. For example, investors who had contributed $5000 were reported as contributing $10000. This led to massive confusion.

This problem is also discussed on the Canadian Money Forum.

What is the Penalty for an Over Contribution to a Tax Free Savings Account?

When TFSAs were first introduced in 2009 all sorts of people immediately started trying to test the system to maximize their profits and minimize their taxes. The CRA set up a penalty for people who contributed too much to their TFSA. That penalty was set at 1% of the amount of extra money deposited in the TFSA per month! So if an investor contributed an extra $1000 they would owe $10 a month for each month the over contribution stayed in the TFSA. That means for a year, the penalty would be at least 12%, a cost much higher than the average benefit of investing.

This 1% is charged based on the highest over contribution during a month. So if you invested $5500 too much on, say, January 1, and removed it on January 3, you would still owe the $50 penalty for that month.

Isn’t It Worth Cheating and Contributing Too Much to a TFSA Even with the Penalty?

The investor will also owe taxes on any money earned by the over contribution. So there is no benefit to over contributing. You might as well invest it outside of your TFSA and pay the tax on any earnings. It’s cheaper than investing it in the TFSA, paying the 1% per month penalty and STILL paying the tax on any earnings.

You can check the Canada Revenue Agency website for examples of taxes and penalties payable on over contributing to a TFSA at http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/txtn/xcssxmpl-eng.html#xmpl3  and the tax form for reporting tax owing as a penalty and as regular tax (Advantage section) on income http://www.cra-arc.gc.ca/E/pbg/tf/rc243/rc243-12e.pdf .

The Questrade Error Is Being Resolved with the Canada Revenue Agency

The Questrade error appears to have only affected contributions made between January 1 and February 4, 2011 based on information discussed by clients on RedFlagDeals.

What Should You Do If Questrade Reported Your Contribution Twice?

Questrade will be sending a corrected version of the information on contributions to the CRA.

Some investors, however, have decided to document the problem with the CRA TFSA Processing Unit. They have sent letters detailing what they contributed and when.

Where Should I Send My Explanatory Letter to the TFSA Processing Unit of the CRA?

The address reported on the CRA website is
TFSA Processing Unit
PO Box 9768 Station T
Ottawa ON K1G 3X9

However, the CRA has reported that it is unnecessary to call or write them at this time as Questrade has advised them of the problem and that it is sending a corrected information file as soon as possible.

You Can Check Your TFSA Contribution History on Line

It’s actually possible to check what the CRA thinks your TFSA contributions have been by using the Canada Revenue Agency website using My Account or Quick Access, or from TIPS the telephone information system. The Tax Information Phone System will only tell you the amount of unused TFSA contribution room as of January 1 of the current year.

UPDATE: Questrade Errors Fixed

According to posts on Redflagdeals.com, the correct information has been supplied to the CRA by Questrade and the corrections have now been implemented. As of April 24 2013 and onwards several forum users have reported their errors have been fixed and the CRA My Account feature now has the correct information for their contributions to TFSAs at Questrade.

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How Can I File My 2012 Canadian Taxes Online in 2013 for Free Using NETFILE if my Income is over $35,000?

Beginning in 2013 for the 2012 income tax year, the Canada Revenue Agency is starting to make it harder to file your taxes using paper forms. Instead of mailing out paper forms to those who used them in 2011, the CRA is telling those people to phone and order the forms, or visit a local post office to pick them up, or print them at home. They are recommending people use NETFILE and file their 2013 Canadian tax returns online. There are quite a few programs that let you NETFILE your tax information for free if you have a low income. But what is available for filing your taxes for free if you have a moderate to high income?

NOTE: local post offices do not carry all of the Canada Revenue Agency forms. If you used to receive some of the specialized forms mailed to your home or business, you will now have to phone to order them or print them off online.

Annoyingly, the CRA did manage to mail a letter to all taxpayers telling them about this change. It stated “free software” is available to file online.

I was suspicious of this statement. One of the reasons why I have been filing paper returns every year is that I had never found any “free” software to NETFILE or e-file. Because I have a business income tax return and a personal income tax return, I also found that most off-the-shelf software was pretty pricey compared to spending an hour and half writing numbers down on a sheet of paper and paying $1.28 to mail it in.

As for those who say “But you’ll have to wait so long for your refund if you paper file.” I say: Why are you getting a refund? Shouldn’t you not overpay your taxes in the first place?

Anyway, I decided to look online to see what these amazing “free” choices had to offer.
The first slap was that the Canada Revenue Agency does not even have a list of approved software for 2013 returns yet. It’s January 23 today. They say the first returns can be filed February 11. So when will they know?!

I then took a look at last year’s approved software. Of the 34 products listed ONE, yes 1!, is free if your income is over $35,000. In fact, almost none are free if your income is over $25,000. So if you have a moderate to high income, there was only one approved free program in 2012 for filing 2011 tax returns using NETFILE.

That one program was called StudioTax by Bhok It Consulting. It was free regardless of income. It does encourage donations, however, to help offset the costs of maintaining and updating the program.

According to the StudioTax website, they continue to offer their product for free for filing 2012 income tax returns in 2013. If it gets approved again by the Canada Revenue Agency, this may be a product I test. Or I may just sharpen my pencil and dig in.

UPDATE: A few weeks later a second program was approved which is free to use by anyone regardless of income. It is called GenuTax.

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Do you resent paying money to file your taxes? Do you really think your software finds deductions that you didn’t already know about? Please share your experiences with a comment.