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Tax-Free Savings Accounts

Confusion still clouds TFSAs Add to ...

Canadians are still confused about the rules for a popular tax shelter heavily promoted by the Conservative government and the big banks, a new study suggests.

At least 72,000 Canadians were hit with unexpected tax bills last June after getting notices they had violated a key restriction on Tax-Free Savings Accounts, or TFSAs.

The little-known wrinkle says account holders can put back amounts they withdraw from a TFSA only in the next calendar year. If they do so in the same year, they face a tax hit for their "overcontribution," even though they're only replacing the withdrawn funds.

And a focus group study last fall found TFSA account-holders remain confused - and most were unable to navigate the Canada Revenue Agency's difficult website to find the proper rules.

"There was very little top-of-mind awareness of rules around the withdrawing and putting money back in within the same calendar year," says the November report by Sage Research Corp., commissioned by the Canada Revenue Agency.

"Overall the results indicate there may be substantial uncertainty and confusion around how withdrawals affect contribution room."

The $40,000 study involved six focus groups gathered late September in Calgary, Toronto and Montreal, more than three months after the controversy first erupted. Every member of each seven-person focus group had previously opened a TFSA account.

Participants were also experienced in Web browsing - but were stymied by the revenue agency's own website when asked to locate the rules governing TFSAs. Navigation proved difficult even for Internet veterans.

"Overall, less than half the participants arrived at the correct information page within the time allotted (three to five minutes), and only a small number arrived at this page quickly," says the November report.

"Several participants commented that had the moderator not told them to look for a TFSA guide, they would never have realized a guide is available at the site."

Millions of Tax-Free Savings Accounts have been set up since they came into effect on Jan. 1, 2009. Canadians can deposit up to $5,000 each year, and any earnings in the account attract no taxes, though deposits do not reduce taxable income as do RRSP deposits.

In a tacit admission of the government's poor communications, the agency has issued tax waivers - averaging $179.10 each - to more than three-quarters of the 22,000 TFSA account-holders caught by the rule last June and who later asked for relief. Officials are still reviewing the files of the remainder. Another 28,100 people simply paid the extra tax.

Confusion about the TFSA overcontribution rule can be traced back to Feb. 26, 2008, when Finance Minister Jim Flaherty announced the surprise tax shelter in his budget.

A glossy TFSA brochure distributed that day provided details about the various rules and offered five fictional examples, including those of "Gillian" and "Robert," who make withdrawals from their accounts and replace the money later.

Nowhere is the next-year rule ever stated in the brochure, which was later heavily reprinted with identical information and distributed across Canada.

"Our government recognizes that there was some genuine confusion about the rules for the TFSA in the first year," Mr. Flaherty and Revenue Minister Keith Ashfield said in a statement last June 25.

"We understand that it may take time for some Canadians to learn about the program and for some financial institutions to properly inform their clients about this product. ... We have taken the decision to be as flexible as possible in cases where a genuine misunderstanding of the TFSA contribution rules occurred."

Canada Revenue Agency spokesman Noel Carisse says that as a result of the focus-group study, the agency website has been updated to make it more user-friendly. A TFSA tip sheet outlining the next-year rule was also issued earlier this month.

Craigleith, Ont., retiree George Czerny, who successfully appealed to CRA to get his $200 in overcontribution taxes refunded, blames both the federal government and the big banks for his financial headache.

"I'm not against TFSAs, but I deplore the way the program was launched," he says, citing a copy of the brochure sent to him by the office of Helena Guergis, his local MP. "Our big banks [also]have some culpability."

A spokeswoman for the Canadian Bankers Association noted that individual institutions can never be certain of any client's overall TFSA contributions, because accounts can be held at more than one bank.

"This is a new product and it is regrettable that there has been some confusion about the rules," said media relations director Maura Drew-Lytle.

She added the association updated its own website last June to emphasize the misunderstood recontribution rule, which now is in boldface type.

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