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Mark Blinch

Sarah Yu feels ripped off. She opened a Tax-Free Savings Account last year trying to do the responsible thing with her savings. Now she's on the hook for $60.67 in penalty taxes.

Ms. Yu, publicity manager for Self-Counsel Press in Vancouver, started contributing to her TFSA after her dad, a Bank of Nova Scotia branch manager, helped her set up the account. After receiving a letter from the Canada Revenue Agency last week advising her she owed penalty taxes for over-contributing, she went back through all her account statements.

"I don't get it," said Ms. Yu, 27. "I'm poor! It has never been over $5,000. I will be taking it up with the bank. I will appeal it. I'm not going to pay it."

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Ms. Yu is not alone. More than 70,000 Canadians received similar letters from the CRA last week advising them they had gone over the $5,000 contribution limit for 2009 and would have to pay a 1-per-cent penalty tax for each month they were in an over-contribution position.

"I treated it like a savings account, but I withdrew from it quite a bit as well, so maybe that's what happened," Ms. Yu said. "I'm not sure."


John Stockton, a 60-year-old Toronto retiree, got a letter saying he owes $200 in penalty taxes after he moved his $5,000 contribution from one financial institution to another to get a better interest rate. He earned $53 in interest within the TFSA.

"Just switching between accounts, you shouldn't be charged for that," Mr. Stockton said. He is also planning to appeal the penalty. "People that screwed up this year, there should be some forgiveness for it."

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CRA spokesman Philippe Brideau said the letter mailed out is not an official Notice of Assessment. "It is a calculation of tax that may be payable based on information provided to the CRA by the TFSA holder's financial institution," he said.

Those who received these letters have a few options, Mr. Brideau said. If they agree with the calculation, they can sign and return the form, which will be followed up by a Notice of Assessment. If they disagree, they should call their financial institution to ensure the information is accurate. They can also contact the CRA for more information. After a Notice of Assessment is received, they can make a formal objection by sending in a completed Form T400A, Objection - Income Tax Act. See the CRA website for more information.

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If you're still in an over-contribution position, meaning you have contributed more than $10,000 for last year and this year combined, you will have to move the excess amount to a different account or risk incurring additional penalties.

. Weigh in on whether you would stash some extra money into an RRSP, RESP or a TFSA.

For some savers, the TFSA misstep may prove costly. A 35-year-old unemployed woman, too embarrassed to give her name, told The Globe and Mail she opened a TFSA in April, 2009, after an adviser at a TD Bank branch suggested she could save on capital gains taxes by putting her savings into a TFSA earning 1.25-per-cent interest. Unaware of the $5,000 limit, she opened an account online and deposited small sums over the next nine months that eventually added up to more than $20,000. On Friday, she got a letter from the CRA saying she owes $1,200 in penalty taxes. She says she only made about $100 in interest within the TFSA.

"Now, instead of saving the money, I'm losing the money," she said. "For what? What did I do? Yesterday I was on the road driving my car and I was thinking about it and I almost got into an accident because all I could think was, 'How come the government wants to take my money?' And why is it that I have to now spend all of my time calling people and writing explanation letters with the hope that maybe they will waive that penalty, which might not even happen?"

<iframe src="" scrolling="no" height="650px" width="600px" frameBorder ="0" allowTransparency="true" ><a href="" >Got a TFSA question?</a></iframe>

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Editor's note: An earlier online version of this story and the original newspaper version of this story stated recipients of Canada Revenue Agency letters regarding Tax-Free Savings Account over-contributions could file a formal objection by sending in a completed Form T400A. This form should be submitted following a Notice of Assessment, not beforehand. This online version has been corrected.

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