On April 30, 2010 Finance Minister Flaherty unveiled Draft Legislation and Explanatory Notes related to changes in the TFSA effective after October 16, 2009.

Highlights of the changes are as follows:

New Penalties for TFSA Abusers

Although Tax-Free Savings Accounts are fairly new, many have found ways to abuse it.  The Department of Finance has moved quickly to stop those abuses with penalty provisions which will be effective for TFSA transactions occurring after October 16, 2009:

  • Excess Contributions.  When taxpayers make contributions over the allowed maximum, they are subject to a 1% per month penalty until the amounts area is removed.  However, if taxpayers are willing to pay the penalty tax in order to keep the money in the plan, hoping to reap an even higher tax-free return on the excess contribution, 100% of the gains will be subject to tax when deliberate over contributions occur after October 16, 2009.
  • TFSA Eligible Investments.  The same eligible investments as allowed within an RRSP will apply to the TFSA.  A special rule will prohibit a TFSA from making an investment in any entity with which the account holder does not deal at arm’s length, and for occurrences after October 16, 2009, a 100% penalty tax on the income so earned will apply.
  • Swapping for Tax-Free Gains.  When taxpayers swap investments from non-registered accounts for cash in the TFSA, and then swap them back out for a revised, higher price point, thereby leaving gains in the TFSA to be tax free, 100% of the gains are subject to tax, after October 16, 2009.

The Canada Revenue Agency has also issued a form and two related schedules to calculate the taxes and penalties imposed on excess contributions or prohibited or non-qualified investments.  The TFSA return and any related payments are due by June 30th in the year following the end of the calendar year.

  • RC243 Tax-Free Savings Account (TFSA) Return 2009
  • RC243 SCH-A Schedule A – Excess TFSA Amounts
  • RC243-SCH-B Schedule B – Non-Resident Contributions to a Tax Free Savings Account (TFSA)

These forms can be obtained on Canada Revenue Agency’s website.

In June 2011 the federal Taxpayers’ Ombudsman released the report KNOWING THE RULES in which it stated that the Canada Revenue Agency should have been more active in letting Canadians know about the income tax consequences & penalties of investing in the tax free savings accounts (TFSAs).

Canada’s Ministers of National Revenue and Finance confirmed in a news release issued on August 19, 2011 that, for the 2010 filing year, the government will be “as flexible as possible in cases where a genuine misunderstanding of the TFSA contribution rules occurred”.

The Canada Revenue Agency should therefore offer the same relief for the 2010 filing year as they did for the 2009 taxation filing year.

Every TFSA holder who receives a letter indicating that they may have over contributed will be able to ask the Canada Revenue Agency to review their specific file and, where appropriate, waive taxes on excess contributions
for the 2010 taxation year. An individual who receives a proposed TFSA return has 60 days to provide more information: such a proposed return is not a notice of assessment. Individuals should consult with the Chartered
Accountants and or tax advisors to confirm if they qualify for relief from the penalties assessed.

We have attached a link to the special report prepared by J. Paul Dube’, the Taxpayers Ombudsman called KNOWING THE RULES, Confusion About the Rules Governing the Tax – Free Savings Account.

The attached is a excellent overview of the TFSA and provides some helpful insights into this matter.

Conclusion

If you have any questions regarding the above Tax Free Savings Account or any income tax issues, do not hesitate in calling Joe Truscott at 905-528-0234 or email Joe at [email protected].