The federal government has extended a deadline for Canadians to explain how they amassed overpayments in tax free savings accounts.

About 70,000 Canadians were sent letters in early June saying they owed the Canada Revenue Agency taxes as a result of overpayments to the plan, and demanding they explain how it happened.

The initial deadline was set for June 30, which gave taxpayers little time to understand what went wrong and respond.

The new deadline is Aug. 3, 2010.

Extremely popular

About 4.7 million Canadians have opted for the tax free accounts since they were introduced by Finance Minister Jim Flaherty.

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Federal Finance Minister Jim Flaherty acknowleges there has been genuine confusion over tax free savings accounts. ((Graham Hughes/Canadian Press))

Under the plan, people set up accounts where money can be saved or invested without paying tax. The maximum annual limit is currently $5,000.

However, some people misinterpreted the rules and opened more than one TFSA, while others withdrew and redeposited money into the account.

In a media statement, the Canada Revenue Agency acknowledged there was genuine confusion about the rules of the TFSA in its first year.

CRA spokeswoman Caitlin Workman told CBC News the program is relatively simple.

"As long as you understand the rules of the TFSA and you obey them, and I think most people did, you don't pay tax on the interest you accrue within your TFSA and you don't pay tax when you withdraw the amounts," she said.

However, she said, some taxpayers assumed they could withdraw money from the account and then pay it back without being assessed taxes. 

Once money is taken out, she explained, the account can't be topped up in the same tax year.

"They should be waiting for next year to replace it, and there won't be any tax consequences to replace it next year," she said.

According to the CRA, every case will be reviewed individually to see if the overpayments were deliberate or a misunderstanding of the rules.

Where appropriate, the CRA said, it will waive taxes on excess contributions for 2009.