If you engage in frequent trading in your TFSA, such as day trading, your TFSA may be considered to carry on a business. In this case, the TFSA profits could be taxed as business income at the highest personal tax rate. This varies by province or territory, but it is generally over 50%.
What to do if you overcontribute
If you overcontribute to a TFSA, the best thing to do is make a withdrawal as soon as possible to avoid accruing additional penalties. If you notice the overcontribution on your own, you can file a RC243 TFSA return to report it and calculate the penalty. If CRA notices first, they may send you a proposed TFSA return—a letter that includes information on TFSA rules, the CRA’s penalty calculations and instructions on how to respond.
In your case, Natalie, I gather CRA contacted you about the overcontribution. In terms of recourse, CRA states: “We can waive or cancel all or part of the taxes if we determine it is fair to do so after reviewing all factors, including whether the tax arose because of a reasonable error.”
In order for CRA to consider a request, you must send “a letter that explains why the tax liability arose, and why it would be fair to cancel or waive all or part of the tax.”
If you disagree with a TFSA penalty assessment, you can file a formal appeal within 90 days of the date of the assessment by completing form T400A Notice of Objection.
Final thoughts
It is ultimately the obligation of a taxpayer to monitor their TFSA room. You could try to dispute the overcontribution penalty with CRA, Natalie, on the basis that your financial advisor did not follow your instructions and made an error by contributing more to your TFSA than you requested.
If you pay your financial advisor a management fee, you probably did not pay a commission to buy the investments, so I do not think there is anything to ask him to repay. And the management fees would still have been earned had the deposit been made to another account or had the funds been left in an existing account.
If you do incur a penalty from CRA, it may be reasonable to ask your financial advisor to cover some or all of it, if the penalty was indeed the result of not following your instructions. If the matter is not resolved to your satisfaction, I suppose you could speak to the advisor’s manager to address the issue. Hopefully, between the advisor and their manager, you can figure out a fair resolution.
