As a starting point, before making a TFSA contribution, be sure that you
qualify to make the investment in the first place. The account holder must
be over 18 and a resident of Canada. If you cease to be a Canadian
resident, you do qualify for full TFSA contribution room in the year you
leave the country. However, if someone makes the contribution on your
behalf after you leave, the investment is offside. You cannot exceed the
current year’s contribution limit ($5,500) when making your contribution,
and the cumulative dollar limit in the plan cannot exceed $52,000, plus
earnings from qualifying investments, unless you are a successor holder of
the TFSA balance from your deceased spouse.
You also need to know that if you withdraw money from the plan, you have to
wait until the new year to recontribute unless you have unused contribution
room in the year of the withdrawal.
If you have already received a TFSA audit letter, it’s important to know
that the audit process generally begins with the proposal of a penalty tax.
The important thing to remember is that the proposed return is not a
formal assessment of tax
. Canadians do have the right to respond to the taxes CRA has calculated on
Proposed Tax-Free Savings Account (TFSA) Return they will send you.
While you can’t file a Notice of Objection in response to a proposed TFSA
return, you can either agree and pay the proposed amounts or you can
disagree with an explanation and correction. For example, if you have
indeed made an excess contribution, the correction is simply this: Remove
the overcontribution or prohibited or non-qualified investment and show
proof that you have done so.
The CRA also has the ability to waive any penalty tax and related interest
if you can show there was a reasonable error in making the incorrect
contributions and that you have taken steps to remove the excess as
explained above. So, it’s important to be proactive, timely, and complete
in your response. Help from a qualified tax expert, for example, a
Tax Services Specialist, is always a good idea in these cases.
Here’s why: Being offside in your investment choices can attract very
expensive penalties. They are levied in two tiers: first, 50% of the fair
market value (FMV) of the prohibited investment is charged. In addition,
there is an “advantage tax” of 100% on the earnings! That tax applies to
any income or capital gain from the prohibited investment, plus any income
or capital gain derived from the reinvestment of those amounts. The
dividend gross-up is disregarded for these purposes.
If you can show CRA that you have disposed of your non-qualified or
prohibited investment, you may be entitled to a refund of taxes paid in two
* If the property was disposed of before the end of the calendar year
following the calendar year in which the tax arose; or
* The property ceases to be a non-qualified or prohibited investment before
the end of the calendar year following the calendar year in which the tax
You will also have to convince the CRA that you did not know that the
property was or would become a non-qualified or prohibited investment to
avoid the taxes. Therefore, if you are in the investment business, and
should have known better, CRA will take a harder line.
This is where day traders could also be caught in an unfortunate
Folio S3-F10-C1 and
C2 explains prohibited and qualifying investments for registered accounts,
including TFSAs, but does so poorly. There are some twists and turns that
can certainly make it difficult to understand CRA’s assessing policies. The
rules can be misleading, as some taxpayers have unfortunately discovered,
because CRA does not assess prohibited and qualifying investments
“collectively” but rather, it appears, “individually.”
We’ll look at how easy it is for day traders in particular to get caught in
overcontributions to their TFSA.
originally appeared in the
Knowledge Bureau Report, © 2017 The Knowledge Bureau, Inc. Reprinted with permission. All
Notes and Disclaimer
©2017 by Fund Library. All rights reserved.
The foregoing is for general information purposes only and is the opinion
of the writer. No guarantee of investment performance is made or implied.
It is not intended to provide specific personalized advice including,
without limitation, investment, financial, legal, accounting or tax advice.