Canada

Tens of thousands of Canadians have again broken the rules for a popular tax shelter, triggering yet another volley of warning letters from the Canada Revenue Agency.

The agency has sent some 76,000 Canadians a mailout reminding them of the strict rules against overcontributions to tax-free savings accounts or TFSAs and demanding they pay more tax.

The number of problem accounts identified is down from the 103,000 warnings sent out in August last year, but up from 72,000 the year before, suggesting the overcontribution problem is becoming chronic.

About 15,000 people who got warning letters this June also received similar letters last summer, indicating a slow learning curve for some taxpayers.

A spokesman for the agency notes the number of problem accounts is a tiny fraction of all the TFSA accounts opened by 8.2 million Canadians by the end of the 2011 tax year.

Tax-free savings accounts, which became available on Jan. 1, 2009, allow Canadians to earn money on deposits inside the account without attracting any income tax, even when money is withdrawn.

The current maximum annual contribution is $5,000.

But there is a poorly understood wrinkle in a rule governing the timing of deposits.

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so in the same calendar year, they face a tax hit for their "overcontribution," even though they're only replacing the withdrawn funds.

Canada's banks and the tax agency itself highlighted the rule on websites and financial brochures once the widespread misunderstanding first became apparent in June 2010.

But despite those efforts, tens of thousands of account-holders continue to fall afoul of the rules.