A short-term overdraft in a TFSA may arise, for example, as a result of a settlement mismatch (e.g. a security sold with three-day settlement and a purchase with same-day settlement, a trading error, funding of a purchase with an NSF cheque, a client-initiated purchase with insufficient funds or fees exceeding available balances. CRA stated:
It is clear that monies were provided to the TFSA trust in order to complete the payment out of the TFSA trust thereby creating a lender/borrower relationship. … As a result, the TFSA trust would be considered to have borrowed money.
… However, where an overdraft is created in respect of fees charged to the TFSA but which remain unpaid… [this] would not constitute borrowing of money or other property for the purposes of paragraph 146.2(2)(f). …
Turning to the cashless exercise of warrants, CRA stated:
[T]he broker advanced the funds to the TFSA trust necessary to exercise the warrants in question. The broker, acting as an agent of the TFSA trust, exercised the warrants, obtained the underlying shares, and then sold the shares to a third party. Using the sale proceeds, the broker recovered their portion of monies used to exercise the warrants plus any fees or charges and provided the remaining monies to the TFSA trust.
…[T]his is a form of buying on margin which clearly involves a lender/borrower relationship and therefore would be considered borrowing money.
Respecting administrative accommodation, CRA stated:
The CRA will not apply paragraph 146.2(5)(c) to an overdraft in a TFSA if it:
- is temporary in nature and covered without undue delay;
- arises as a result of (i) a mismatch of cash flow due to differences in standard settlement cycles for securities, (ii) a reasonable error, or (iii) an unintended infrequent event; and
- does not have the character of leveraged investing.
This… is intended to accommodate certain overdrafts of very short duration that are quickly or naturally reversed or that are infrequent and inadvertent…[and] does not apply to borrowing… in connection with a cashless exercise of warrants... .