Wednesday, 21 September 2011

CRA begins to tighten up on TFSA rule-breakers

I always cringe when CRA brings the hammer down.  With an often uncoordinated swing, auditors squash innocent people while attempting to stop the over-creative types from abusing a good thing.  Now don't get me wrong, I use all kinds of tax planning to minimize my clients tax burden - I just make sure to stay far enough away that we don't get mashed by the gavel.

To say that TFSA's still have some growing to do is an understatement.  First available in 2009, only minor changes have been made to TFSA legislation. CRA has recently started their fish-in-a-barrel shooting spree as much of the misunderstood/ambiguous rules have been broken. According to the Toronto Star, 103,000 Canadians were sent a letter in 2010 outlining penalties that had been imposed because of their TFSA over-contribution. After heavy criticism that the rules were confusing and unclear, CRA refunded the penalties. Although it was a nice gesture to extend that grace, CRA's mercy has a short shelf life.

On the other side of the coin, the over-creative types are taking advantage of the poor clarity to leverage up their tax-free investment growth. While many strategies abound, one common tactic is to rotate investments through a TFSA just before they mature. Once matured, a person can remove that investment and replace it with another that is set to mature soon after.

Turning over multiple investments in a year poses two problems for the CRA:
  1. Lost tax revenue on the investment growth. The TFSA is meant to hold an investment from inception to fruition - shuffling investments through your TFSA could soon be considered tax evasion.
  2. Investment growth inside your TFSA creates more new room. Rotating investments through a TFSA unfairly expands usable TFSA room.

Turning over multiple investments in a year poses two problems for you:
  1. When CRA discovers a strategy that crosses a line, they not only ask for the tax back, but charge you interest.
  2. When CRA starts looking at your file, you never know what else they will find.

In the Toronto Star article, Roseman warns of CRA's coming judgement that will likely bite those opportunists in their pocketbooks.
"You can also get into trouble if you withdraw money and replace it in the same calendar year, even if the account value never goes over $5,000."
There is a fine line between being prudent and pushing past the limits. If you see something that looks opportunistic, ask to see an opinion letter issued by an accountant - or get the opinion of your accountant. They have strict guidelines to protect you as a client. Their job is to tell you what the rules and risks are - then you can make an informed decision.

To find out more about TFSA strategies that you can use, contact us.

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