Principal Issues: Is an individual permitted to make deliberate TFSA over-contributions, subject only to the individual paying the applicable 1% per month over-contribution tax?
Position: No.
Reasons: Department of Finance News Release dated October 16, 2009 proposed amendments to make any income reasonably attributable to deliberate overcontributions subject to the existing TFSA advantage rules. Pursuant to these rules, the tax payable on the income will be 100%.
XXXXXXXXXX 2008-030523 D. Wurtele November 5, 2009
Dear XXXXXXXXXX :
Re: Tax-Free Savings Account (TFSA) - Deliberate Over-contributions
This letter is in reply to your email sent January 5, 2009, in which you enquired whether an individual is permitted to make deliberate TFSA over-contributions, subject only to the individual paying the applicable 1% per month over-contribution tax.
Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, "Advance Income Tax Rulings", dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications are available at www.cra-arc.gc.ca/formspubs/menu-e.html. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office, a list of which is available on the "Contact Us" page of the CRA website.
On October 16, 2009, the Honourable Jim Flaherty, Minister of Finance, proposed amendments to the Income Tax Act to address concerns that have arisen regarding the use of TFSAs in tax-planning schemes. One of the proposed amendments is to make any income reasonably attributable to deliberate over-contributions subject to the existing TFSA advantage rules. Pursuant to these rules, the tax payable on the income will be 100%. It is proposed that this measure apply to transactions occurring after October 16, 2009. For more information on the proposed changes, please refer to Finance Canada News Release 2009-099 at www.fin.gc.ca/n08/09-099-eng.asp.
The CRA will be examining any unusual TFSA transactions that occurred prior to October 17, 2009, and applying the existing anti-avoidance rules to challenge aggressive tax planning where appropriate.
We trust that our comments will be of assistance to you.
Mary Pat Baldwin, CA
for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch