Subsection 207.06(1) - Waiver of tax payable
The taxpayer applied for judicial review of a decision of the Minister pursuant to s. 207.06(1) not to waive tax payable on excess contributions to his tax-free savings account. In 2016, the taxpayer had a TFSA contribution limit of $10,045.18, and on January 8, 2016 he contributed $10,000 to his TFSA. When he called 10 days later to ask if the contribution had been processed, the clerk erroneously proceeded to redo the contribution, resulting in an over-contribution of $10,000. In June 2016, the taxpayer requested his financial institution to split his deposits between two separate entities owned by the financial institution to enhancer deposit insurance, but this direction was mistaken for an order to contribute $10,000 to his TFSA, resulting in total contributions in 2016 of $30,000.
The taxpayer did not become aware of these over-contributions until July 2017 when he was assessed, following which he promptly withdrew the excess $20,000. The taxpayer’s requested relief included waiver of the Part XI.01tax of $1,784.60. The Delegate declined the request on the basis that he was a repeat over-contributor (respecting what in fact, in 2014, was his transfer of his TFSA contribution from one financial institution to another for which CRA waived the penalty tax).
Boswell J stated (at paras 30 and 31):
The over-contributions arose due to miscommunications between the Applicant and his financial institution and were outside of his control. … The Delegate’s characterization of the Applicant as “a repeat over-contributor to his TFSA account” is unjustified, especially when one considers that the CRA granted his request for a waiver of the tax imposed on the 2014 excess contribution.
… [T]he Delegate’s decision is unreasonable because it did not fully assess the extent to which the excess contributions resulted from the mistakes of persons other than the Applicant. The decision will therefore be set aside and the matter returned to the Minister for redetermination by a different delegate.
Robitaille v. The Queen, 2019 TCC 200 (Informal Procedure)
The taxpayer, as a result of tapping the wrong icon on an ATM machine, inadvertently deposited $40,000 to his TFSA rather than his chequing account. He did not discover this until the overcontribution was drawn to his attention by a CRA agent almost a year later, at which point he immediately withdrew the $40,000. He had in a previous year made a $5,000 over-contribution, so that CRA did not apply its policy of automatic relief for first-time over-contributors.
Spiro J found that the Minister’s assessment of tax under s. 207.07(1)(b) was correct, but then stated, obiter (at para. 30):
Should the Minister decide to exercise her discretion under subsection 207.06(1) of the Act to cancel the Appellant’s liability in respect of the inadvertent deposit of $40,000 to his TFSA on the night of July 21, 2016, such cancellation would find ample support on the extraordinary facts of this case
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|Tax Topics - Income Tax Act - Section 207.02||a fully-unintended TFSA overcontribution generated over-contribution tax||207|
30 October 2012 Ontario CTF Roundtable, 2012-0462901C6 - Waiver or Cancellation of Part XI.01 Taxes Payable
Description of procedure to apply under s. 207.06 for the waiver or cancellation of tax.
From May 15 to October 17, 2009, the taxpayer directed 71 “swaps” under which TSX-listed shares were transferred between her self-directed TFSA and her taxable trading account at a discount brokerage (“TDW”), or between her TFSA and her self-directed registered retirement savings plan (also with TDW). The transfers were made near the close of trading for the day, and at the high trading price for the day if she was transferring out of her TFSA, and at the low price where she was transferring in. She ceased directing the swaps on the introduction of specific “swap transaction” rules effective October 17, 2009. However, she was assessed under s. 207.01(2) in amounts equalling 100% of the increase in the fair market value of her TFSA in 2009, 2010 and 2012 of $200,795, $70,841 and $29,217, respectively (her TFSA having decreased in value in 2011), on the basis that those FMV increases were “advantages” described in s. (b)(i) of the s. 207.01(1) definition.
Before dismissing the taxpayer’s appeal of 2009, Dawson JA stated (at para. 50):
… [T]he use of the phrase “directly or indirectly” evidences Parliament’s intent “to capture any and all methods through which a transaction could increase” the fair market value of a TFSA.
In allowing the Crown’s appeal of 2010 and 2012, she stated (at paras. 75, 82):
[T]he Tax Court’s concern about “when or how far into the future an advantage … will be considered as attributable to” abusive transactions did not justify a restrictive interpretation of the definition of advantage. Such concern is intended to be addressed by other legislative provisions, including the Minister’s ability to waive or cancel advantage taxes (subsection 207.06(2) of the Act) and to determine the unused TFSA contribution room (subsection 207.01(1) of the Act and more particularly the definition of “unused TFSA contribution room” as enacted in S.C., 2010, c. 25, subsections 57(5) and 57(8). … The ability to waive an advantage tax and reset an individual’s unused TFSA contribution room are the mechanisms intended to address the future impact of abusive transactions.
… [W]hile the increase in value in the TFSA in 2010 and 2012 was directly attributable to the performance of the shares held in the TFSA each year, it was indirectly attributable to the swap transactions which increased the number of shares held in the TFSA and their value.
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|Tax Topics - Income Tax Act - Section 207.01 - Subsection 207.01(1) - Advantage - Paragraph (b) - Subparagraph (b)(i)||advantages generated in Year 1 from swap transactions continued to produce indirect advantages thereafter||525|
|Tax Topics - Income Tax Act - Section 248 - Subsection 248(10)||no necessity for predetermined endpoint or advance determination of price||203|
|Tax Topics - Income Tax Act - Section 251 - Subsection 251(1) - Paragraph 251(1)(c)||taxpayer was directing mind in transactions involving an arm’s length trustee||133|
Before rejecting the taxpayer’s position (summarized at para. 16) that s. 207.05 was in contravened s. 53 of the Constitution Act, 1867 because “the existence of the discretionary relieving provision of section 207.06 following 207.05 gives the Minister the discretion to set the tax rate from anywhere between 0 and 100 percent thus amounting to an implied delegation of the right to set the tax rate”, Pizzitelli J noted (at para. 44) that CRA in some instances had waived a portion of the advantage tax so as to impose tax at the taxpayer’s top marginal rate, and stated (at para 45):
The fact the CRA would point out its ability to waive or cancel penalties and invite representations is, in my view, an appropriate courtesy to the taxpayer and a transparent acknowledgment indicating it has such power. … The Minister must still consider … the three criteria he is mandated to consider in subsection 207.06(2) … to discharge his discretionary duty.
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|Tax Topics - Income Tax Act - Section 207.05 - Subsection 207.05(2)||discretion under s. 207.06(2) did not render s. 207.05 unconstitutional||357|
|Tax Topics - Other Legislation/Constitution - Constitution Act, 1867 - Section 91 - Subsection 91(3)||100% TFSA advantage tax did not infringe provincial property-and-civil-rights power||212|
|Tax Topics - Other Legislation/Constitution - Constitution Act, 1867 - Section 53||CRA’s discretion to waive tax does not render the tax unconstitutional||151|
Factors relevant to waiver of tax
2.36 Subsection 207.06(2) gives the Minister the authority to waive or cancel all or part of the 50% tax on prohibited investments or the 100% advantage tax in appropriate circumstances. Various factors will be taken into account including reasonable error, the extent to which the transactions that gave rise to the tax also gave rise to another tax, and the extent to which payments were made from the taxpayer’s registered plan. ...
2.38 The CRA administers the waiver provisions in a fair and flexible manner in order to promote voluntary compliance with these rules and to encourage taxpayers to come forward and correct situations that do not conform to these rules, particularly those that involve pre-March 23, 2011 investments held in an RRSP or RRIF. Each waiver request will be considered on its own merits.
The following example illustrates a situation in which the CRA may give favourable consideration to a request that the 100% advantage tax be waived.
Martin holds 5% of the common shares of a private company in his TFSA and another 4% of the shares outside of his TFSA. The shares are a qualified investment and are not a prohibited investment for the TFSA.
The company subsequently redeems a significant number of shares held by the principal shareholder. Martin had no involvement with or any influence over the decision to redeem the shares. As a result of the share redemption, Martin (directly and in his TFSA) holds 12% of the company's common shares.
Upon learning of the share redemption later that year, Martin immediately swaps the shares out of the TFSA for fair market value consideration. From the time the shares became prohibited to the time the shares are swapped out of the TFSA, the shares appreciate in value by $11,000.
Martin’s 12% interest of the company’s common shares constitutes a significant interest in the company. This means the shares became a prohibited investment for his TFSA.
Although Martin qualifies for a refund of the 50% prohibited investment tax..., the portion of the capital gain that accrued while the shares are a prohibited investment constitutes an advantage and is subject to the 100% advantage tax.
Martin withdraws the $11,000 amount from his TFSA without delay and submits a waiver request which the CRA approves. The amount withdrawn from the TFSA will be included in Martin’s income pursuant to paragraph 12(1)(z.5) and section 207.061. Although a detailed discussion of TFSAs is beyond the scope of this Chapter and this Example, it is worth noting that the amount will not be added to his TFSA contribution limit. This is because, as a specified distribution, it is expressly excluded from variable C in the formula in the definition excess TFSA amount in subsection 207.01(1).