Tax Tip Thursday

I want to talk about TFSAs today.

They have been in existence for 16 years now with a contribution amount to date of $109k.

I have seen people’s TFSA with literally a $1 million in them!

Because of this, there has been a lot of press around them.

The Canada Revenue Agency (CRA) monitors several activities within Tax-Free Savings Accounts (TFSAs) that are considered red flags for potential misuse, including over-contributions, engaging in business-like trading, and holding non-qualified investments. These activities can lead to significant tax penalties.

Common CRA Red Flags

• Frequent or Day Trading: The CRA considers a TFSA a savings and investment vehicle, not a business operation. Frequent, speculative buying and selling of securities with short holding periods may be classified as carrying on a business, making all generated income fully taxable.
• Over-contributions: Exceeding your personal TFSA contribution limit is a common mistake. A penalty tax of 1% per month is charged on the highest excess amount until it is withdrawn or absorbed by new contribution room in the next year.
• Contributing While a Non-Resident: If you become a non-resident of Canada for tax purposes, you cannot contribute to your TFSA without incurring a 1% monthly penalty on the contribution amount.
• Prohibited or Non-Qualified Investments: Holding certain assets like shares of a private company in which you have a significant interest (10% or more), or assets not traded on a designated stock exchange, can trigger a 50% tax on the fair market value of the investment, plus a 100% tax on any income or capital gains derived from it.
• “Advantage” Transactions: This includes transactions designed to artificially benefit from the TFSA’s tax-exempt status, such as non-arm’s length transactions or certain swap transactions. These can be subject to a 100% tax on the benefit or advantage.

How to Avoid Issues

• Track Your Room: Do not solely rely on the CRA’s My Account information, as it may be delayed. Keep a personal log of all contributions and withdrawals.
• Understand Withdrawal Rules: Withdrawn amounts are only added back to your contribution room on January 1 of the following calendar year. Re-contributing in the same year can easily cause an over-contribution.
• Stick to Qualified Investments: Ensure all investments are traded on a designated stock exchange and adhere to CRA guidelines to avoid penalties.
• Consult a Professional: For complex situations, such as becoming a non-resident or dealing with large, rapid account growth, consult a tax professional to ensure compliance. You can access more information and forms via the official Canada.ca website.

The Canada Revenue Agency (CRA) monitors several activities within Tax-Free Savings Accounts (TFSAs) that are considered red flags for potential misuse, including over-contributions, engaging in business-like trading, and holding non-qualified investments. These activities can lead to significant tax penalties.

Common CRA Red Flags

• Frequent or Day Trading: The CRA considers a TFSA a savings and investment vehicle, not a business operation. Frequent, speculative buying and selling of securities with short holding periods may be classified as carrying on a business, making all generated income fully taxable.
• Over-contributions: Exceeding your personal TFSA contribution limit is a common mistake. A penalty tax of 1% per month is charged on the highest excess amount until it is withdrawn or absorbed by new contribution room in the next year.
• Contributing While a Non-Resident: If you become a non-resident of Canada for tax purposes, you cannot contribute to your TFSA without incurring a 1% monthly penalty on the contribution amount.
• Prohibited or Non-Qualified Investments: Holding certain assets like shares of a private company in which you have a significant interest (10% or more), or assets not traded on a designated stock exchange, can trigger a 50% tax on the fair market value of the investment, plus a 100% tax on any income or capital gains derived from it.
• “Advantage” Transactions: This includes transactions designed to artificially benefit from the TFSA’s tax-exempt status, such as non-arm’s length transactions or certain swap transactions. These can be subject to a 100% tax on the benefit or advantage.

How to Avoid Issues

• Track Your Room: Do not solely rely on the CRA’s My Account information, as it may be delayed. Keep a personal log of all contributions and withdrawals.
• Understand Withdrawal Rules: Withdrawn amounts are only added back to your contribution room on January 1 of the following calendar year. Re-contributing in the same year can easily cause an over-contribution.
• Stick to Qualified Investments: Ensure all investments are traded on a designated stock exchange and adhere to CRA guidelines to avoid penalties.
• Consult a Professional: For complex situations, such as becoming a non-resident or dealing with large, rapid account growth, consult a tax professional to ensure compliance. You can access more information and forms via the official Canada.ca website.

Come to speak to us about the benefits of TFSAs! Make An Appointment today!

Disclaimer:

This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal or tax advice nor can it or should it be relied upon. All tax situations are specific to each individual. If you have specific tax questions you should book an appointment for a 1 on 1 consultation.