Download Tax-free savings accounts (TFSAs)

Tax-free savings accounts (TFSAs):
Making the most of them
Helps you
maximize the
benefits and
navigate the
complexities of
TFSAs.
February 28, 2013
Commencing 2013, the annual tax-free savings account (TFSA) contribution limit has
increased to $5,500 from $5,000, making this savings vehicle even more attractive. You can
use TFSAs to save for any purpose, including retirement, buying a home, starting a small
business and taking a vacation.
The merits of the TFSA make it a high-priority investment option, in addition to contributing
to your registered retirement savings plans (RRSPs) and paying down a mortgage on your
principal residence. To make the most of your TFSA it is important to compare your savings
options, and avoid the myriad pitfalls and anti-avoidance rules that can apply.
This Tax memo1 discusses the TFSA rules and how a TFSA can benefit you. It covers the
following topics:
The basics .................................................... 1
Why open a TFSA?..................................... 2
Contribution room ..................................... 2
Qualifying investments .............................. 3
Death of a TFSA holder ............................. 3
Marital breakdown .................................... 5
Non-residents ............................................ 5
U.S. citizens resident in Canada ............... 5
Comparing saving options......................... 6
Appendix: Anti-avoidance rules ............... 8
We can help ...............................................12
The basics
Canadian residents aged 18 years2 and older who have a social insurance number can
contribute to a TFSA. The annual TFSA contribution limit was $5,000 from 2009 (when
TFSAs were introduced) to 2012. This limit is indexed (rounded to the nearest $500) and
increased to $5,500 in 2013.3
TFSAs are available at banks, insurance companies, credit unions and trust companies. They
are generally structured as deposits, annuity contracts or arrangements in trust. The
1. This Tax memo replaces our Tax memo “Tax-Free Savings Account – A Good Way to Save” dated December 18,
2008.
2. Some provinces and territories do not allow individuals to enter into a contract (including opening a TFSA) until
they are 19. Individuals in these jurisdictions, who would otherwise be eligible to open a TFSA, will accumulate
TFSA contribution room for the year they turn 18, which will carry over to the following year.
3. The federal government has proposed to increase the limit to $10,000 when its budget is balanced (scheduled
for 2016).
2013-08
www.pwc.com/ca/taxmemo
2
investments that a TFSA can make are similar to
those that can be made by an RRSP.
Contributions to a TFSA are not tax-deductible and
income (including capital gains) earned in a TFSA is
exempt from income tax. Withdrawals (whether
from capital or income) are tax-free and will
increase your contribution room in future years.
Furthermore, if you contribute less than the annual
contribution limit ($5,500 for 2013; $5,000 from
2009 to 2012), the unused contribution room can be
carried forward indefinitely.
Because income earned in a TFSA is exempt from
tax, interest on money you borrow to contribute to a
TFSA will not be deductible for tax purposes.
Why open a TFSA?
TFSAs are attractive for several reasons:


Tax-free earnings – Income earned in a TFSA is
not taxable, allowing you to grow funds faster
than if invested outside of a TFSA.
Contribution room is not lost on withdrawal –
Amounts withdrawn from your TFSA will be
added to your unused contribution room for
future years.

Income splitting – If you give funds to your
spouse and/or other adult family members to
contribute to a TFSA, the income earned in their
TFSAs will not be taxable to you.

Post-age 71 contributions – You can contribute
to a TFSA after you turn 71, even though this is
when you must wind up your RRSP.


Income-tested benefits – Neither earnings in a
TFSA nor withdrawals will affect income-tested
federal government benefits, such as old age
security, the guaranteed income supplement,
the working income tax benefit, the GST/HST
tax credit, the Canada child tax benefit, the age
amount and employment insurance benefits.
Loan collateral – You can use a TFSA as
collateral for a loan or other indebtedness, if
certain criteria are met.
Contribution room
Contributions to your TFSA cannot exceed your
contribution room for the year, which is calculated
as follows:
Table 1 — TFSA contribution room
A
+ B
+ C
= D
1
A
Annual contribution
limit for the year1
B made in the previous year2
Withdrawals
C
Unused contribution
room from the previous year
D room for the year
Contribution
1. The annual contribution limit is $5,500 for 2013; $5,000 for 2009 to 2012.
The limit is indexed, rounded to the nearest $500.
2. For distributions that do not increase your contribution room, see
Withdrawals on page 3.
Example – TFSA contribution room
Transactions in taxpayer’s TFSA:
2009
2010
2011
Start of year
Contributions
Income/(loss)
Withdrawals
End of year
Nil
$5,000
($3,500)
($600)
$900
$900
$6,000
$4,600
$5,500
$500 $20,000
Nil ($30,000)
$6,000
$1,500
2012
2013
2014
$1,500
Nil
($200)
($300)
$1,000
$1,000
$30,000
$5,000
Nil
$36,000
$5,000
$5,000
$5,500
$5,5001
$300
Nil
N/A
Result: TFSA contribution room:
A1$5,000
A
$5,000
+ B
N/A
B
$600
Nil
$30,000
+ C
N/A
C
Nil2
$1,0002
$5002
$35,500 $11,300
= D
$5,000
D $5,600
$6,000
$35,500
$41,300 $16,800
1. Assumes annual contribution limit remains $5,500 in 2014.
2. The unused contribution room from the previous year is:
Contribution
$5,000
$5,600
$6,000 $35,500 $41,300
room (D)
Less: TFSA
Previous
contributions ($5,000) ($4,600) ($5,500)
Nil ($30,000)
(see above)
year’s
Unused
contribution
Nil
$1,000
$500 $35,500 $11,300
room (C)
You can request your TFSA contribution room from
the Canada Revenue Agency. However, you should
also maintain your own records about your TFSA
transactions.
You can set up more than one TFSA; however, your
contributions to all of your TFSAs cannot exceed
your TFSA contribution room. If you overcontribute
to your TFSAs, you will be liable for a monthly 1%
penalty tax on the excess contributions (see Table 5
in the Appendix). This tax will apply until the
excess contributions are withdrawn or new
contribution room earned in subsequent years
eliminates the excess contribution.
3
Withdrawals
As shown in Table 1 on page 2, withdrawals from a
TFSA increase the contribution room for the
following year. You can replace the amount
withdrawn from a TFSA in the year of the
withdrawal only to the extent you have available
TFSA contribution room for that year (which is
increased by the previous year’s withdrawals). Any
excess re-contribution will be subject to the monthly
1% penalty tax on excess contributions (see Table 5
in the Appendix).
However, the TFSA contribution room is not
increased for certain distributions, including a direct
transfer between:

TFSAs of the same holder; or

a holder’s TFSA and the TFSA of the holder’s
current or former spouse or common-law
partner upon marital breakdown (see Marital
breakdown on page 5).
Table 5 (footnote 2, third paragraph) in the
Appendix lists other distributions that do not
increase the contribution room.
Services fees
The payment of investment counsel, transfer or
other fees by a TFSA will not be considered a
withdrawal from the TFSA, and therefore will not
increase your contribution room. Furthermore,
services fees you pay relating to your TFSA are not
deductible for tax purposes and will not constitute a
contribution to the TFSA.
Qualifying investments
A TFSA can make essentially the same types of
investments as an RRSP. Qualifying investments
include:

money and deposits;

guaranteed investment certificates (GICs);

federal, provincial and municipal bonds and
debts (those of a Crown corporation also
qualify);

public company bonds and debts;

shares listed on prescribed stock exchanges in
Canada or in a foreign country;

annuities;




units or shares of mutual funds;
segregated fund policies;
certain mortgages; and
certain shares of small business corporations.
Although shares listed on prescribed stock
exchanges or in a foreign country are qualifying
investments for a TFSA, dividends paid on these
shares may be subject to foreign withholding tax;
treaty relief for the withholding tax is generally not
available.
Investments that are not qualifying investments are
“non-qualified investments.” In addition, in certain
cases, the qualifying investments could be
“prohibited investments.” As discussed in detail in
the Appendix, non-qualified investments and
prohibited investments are subject to penalties,
while taxes apply to the income arising from these
investments.
In-kind contributions
You can make in-kind contributions of qualifying
investments to your TFSA. The amount of the
contribution will be equal to the fair market value
(FMV) of the property at the time of the
contribution, and you will be considered to have
disposed of the property for this amount. Any
resulting gain will generally be taxable, but a capital
loss will be disallowed for tax purposes.
Death of TFSA holder4
Whether your TFSA will maintain its tax-exempt
status after your death depends on your
circumstances, as discussed below.
Successor holder and beneficiary
designations
Most provinces and territories permit an individual
to designate outside a will a beneficiary to his or her
TFSA in the event of death. That separate
designation generally involves filing the appropriate
forms with the financial institution where the TFSA
4. The text under “Death of a TFSA holder” originally appeared in
the PricewaterhouseCoopers-authored article, “TFSA Always
Tax-Free?” published in Canadian Tax Highlights, in
February 2011, Volume 19, Number 2.
4
was opened: the holder can change the designation
at any time.
Although a TFSA could be created as early as 2009,
some provinces and territories were slow to
introduce measures to permit direct successor
holder and beneficiary designations to be made for a
TFSA that was not an insurance product. For
example, the relevant provisions in Ontario did not
come into effect until May 28, 2009; therefore, an
Ontario-resident individual who had already opened
a TFSA before this date should ensure that any
designation is not dated earlier than May 28, 2009,
to avoid unanticipated tax consequences on death.
In Quebec, a beneficiary designation can be made
only through a will.
Because only a spouse or common-law partner can
be designated as a TFSA’s successor holder, tax
issues may arise because of differences between that
designation and a beneficiary designation.
Surviving spouse designated as
successor holder
A surviving spouse or common-law partner
(referred to as “surviving spouse” or “survivor”) may
be designated as the TFSA’s successor holder on the
former TFSA holder’s death.
If the surviving spouse acquires all the same rights
as the deceased TFSA holder plus the unconditional
right to revoke any previous beneficiary
designations made by the deceased, the survivor
becomes the TFSA holder and suffers no related
income tax consequences. Any income earned or
capital appreciation inside the TFSA continues to be
tax-free.
Alternatively, the TFSA’s assets can be transferred
to the survivor’s TFSA, regardless of whether the
survivor has contribution room, if the transfer
occurs before the end of the first calendar year after
the year of death.
Surviving spouse not designated
as successor holder
A TFSA holder who has not designated a successor
holder can designate his or her spouse as a
beneficiary of the TFSA under his or her will. The
surviving spouse can then make an “exempt
contribution” to his or her TFSA if four conditions
are met:

the contribution is made to the survivor’s TFSA
by the end of the first calendar year after the
year of death (the rollover period);

a payment (a survivor payment) is made directly
or indirectly out of the former TFSA to the
survivor during the rollover period and as a
consequence of the individual’s death;

within 30 days of making the contribution, the
survivor designates it by filing the prescribed
form in the prescribed manner with the CRA; 5
and

the contribution is generally no more than the
least of:
 the total survivor payment;
 the FMV of the assets in the deceased’s
TFSA immediately before death; and
 nil, if the deceased had an excess TFSA
amount immediately before his or her death
or if survivor payments are made to more
than one survivor.
An exempt contribution does not trigger any tax
liability and has no effect on the survivor’s TFSA
contribution room, but all the TFSA’s earnings and
appreciation that arose after the TFSA holder’s
death are taxable to the surviving spouse and/or
other beneficiaries.
If permitted in the province or territory of residence,
it is more tax-efficient to make a successor holder
designation in prescribed form and manner.
Surviving spouse and surviving
adult child
A beneficiary designation made under the original
TFSA holder’s will may divide the TFSA assets
equally between a surviving adult child and the
5. Draft legislative proposals released on December 21, 2012,
allow the Minister to extend the time for the survivor to make
this designation.
5
surviving spouse. In that case, the TFSA—a trust—
generally retains its tax-exempt status until the
earlier of the date on which the trust ceases to exist
and the end of the calendar year following the year
of death (the exemption-end time).
the date of death. The charitable donation tax credit
can be claimed on the deceased’s tax return for the
donation.
Any TFSA value accrued before death may be
distributed tax-free to the plan’s designated
beneficiaries, but only the surviving spouse—not an
adult child—can make an exempt contribution of
funds received to his or her TFSA. The adult child
can contribute the funds received to his or her TFSA
only if he or she has contribution room. Income
earned and appreciation that arises after the TFSA
holder’s death may be taxable to the beneficiaries.
Generally, upon marital breakdown, TFSA property
can be transferred tax-free to the TFSA of a spouse
or common-law partner or of a former spouse or
common-law partner, without affecting the
transferor’s or transferee’s TFSA contribution room.
No surviving spouse
If there is no surviving spouse, the TFSA generally
retains its tax-exempt status for the period
described above. TFSA value accrued before the
holder’s death may be distributed tax-free to a
beneficiary designated for the TFSA or named under
a will. The beneficiary can make a contribution of
the receipt to his or her TFSA if he or she has
contribution room, but not as an exempt
contribution. Income earned or appreciation that
arises after the TFSA holder’s death may be taxable
to the recipient.
No surviving spouse and TFSA
continues to exist after exemption
period
In this case, the TFSA trust becomes a taxable trust
if it continues to exist after the end of the calendar
year following the year of death. Any income earned
or appreciation that arises from the date of death to
the exemption-end time is taxable in the trust’s first
taxation year, which begins after that time, in the
trust’s hands unless the trustees allocate or
distribute it to the former TFSA trust beneficiaries
under regular trust rules.
Donation of TFSA funds
If a registered charity or other qualified donee under
the Income Tax Act was named as a beneficiary of
the deceased’s TFSA, the transfer of funds to the
donee must generally occur within 36 months after
Marital breakdown
Non-residents
If you become a non-resident of Canada, you can
maintain your TFSA. There is no tax upon
emigration or immigration. Further, you will not be
taxed in Canada on any earnings in the TFSA or on
withdrawals. Any withdrawals will be added to your
unused TFSA contribution room in the following
year, but will not be available until you resume
Canadian residence.
As a non-resident, you cannot contribute to a TFSA
and no contribution room will accrue for any year
throughout which you are non-resident. If you
contribute to a TFSA while you are non-resident,
you will be subject to a tax of 1% per month on the
contribution (exceptions apply) until the
contribution is withdrawn or you resume Canadian
residence (whichever is earlier). See the Table 5 in
the Appendix for details.
You can contribute to a TFSA up to the date you
become a non-resident. The annual contribution
limit ($5,500 for 2013) is not pro-rated in the year
of emigration or immigration.
Depending on your country of residence, income
earned in your TFSA may be taxable in that country
in the year it is earned.
U.S. citizens resident in
Canada
Depending upon their personal circumstances, U.S.
citizens and U.S. green card holders who file U.S.
resident tax returns may not benefit from a TFSA. It
6
appears that income earned in a TFSA will be
taxable for U.S. purposes in the year it is earned. In
addition, a U.S. citizen or U.S. green card holder
that invests in a TFSA should ensure all U.S.
reporting requirements are complied with.
Comparing saving options
Canadians have several vehicles to save money for
retirement or other future use. Tables 2 and 3
compare RRSPs, TFSAs and ordinary investments.
A brief discussion follows.
TFSA versus ordinary investments
You can simply invest funds, for example in GICs,
the stock market or mutual funds. These
investments give rise to annual investment income
that is subject to income tax at your marginal tax
rate. If you fund investments for the benefit of your
spouse, the income earned on those investments
generally will be taxable to you, eliminating the
ability to have the income taxed at your spouse’s
lower tax rate.
Table 2 — Comparison of RRSP, TFSA and ordinary investments
RRSP
Contributions tax deductible?
Yes
Investment income taxed?
No
Withdrawals taxed?
Maximum contribution per
year
Effect of
withdrawals
TFSA
No
No — see Table 3
Yes — see Table 3
Yes — the full balance of the RRSP
is subject to tax at taxpayer’s
marginal rates, unless the RRSP is
transferred to spouse or, in certain
circumstances, to a child
N/A
No effect
None for withdrawals — but,
investment income will increase
taxable income and therefore may
decrease income-tested benefits and
credits.
No — but, see Death of
TFSA holder on page 3
Transferable to spouse on
death on a tax-deferred basis?
Penalty on overcontributions
No maximum
Funds withdrawn from a
TFSA may be recontributed
to a TFSA. After a
withdrawal, contribution
room for the next year is
increased by the amount
withdrawn
Withdrawals increase taxable income
On incomeand therefore may decrease incometested benefits
tested benefits and credits, such as
and credits
old age security and the age credit
Deemed disposition on death
resulting in income tax
Yes — see Table 3
No
Lesser of 18% of earned income and $5,500 for 2013
$23,820 for 2013 (subsequently
(subsequently indexed to
indexed for inflation)
inflation)
Once funds have been withdrawn
from an RRSP, the funds cannot be
On contribution
recontributed unless the plan holder
room
has generated additional
contribution room
Ordinary investments
Yes — accrued capital gains are
subject to tax unless investments are
transferred to the spouse
Yes
1% per month on excess
contributions over $2,000
1% per month on excess
contributions— see Table 5
N/A
TFSA
Ordinary investments1
Table 3 — Tax treatment of investment income
RRSP1
Interest
Capital gains
Fully taxable at withdrawal
Tax-free
Capital losses
In effect, fully deductible
Not tax deductible
Canadian
dividends
Eligible Fully taxable at withdrawal, but
2
Non-eligible dividend tax credits are lost
1. Tax rate depends on income level and jurisdiction of residence.
2. Tax credits are higher for eligible dividends.
Tax-free, but dividend tax
credits are lost2
Fully taxable; taxable at up to 50%
50% tax-free; taxable at up to 25%
50% is tax deductible against capital
gains
Taxable at up to 36%
Taxable at up to 41%
7
Because investment income earned in a TFSA is not
subject to income tax, your savings will increase
more quickly within a TFSA than for investments
held personally, assuming the same pre-tax rate of
return. For example, if you contribute $5,500 per
year to a TFSA for 20 years, you will have
approximately $13,000 more in savings than if you
contributed the same amount to a regular savings
account, the income from which is taxed annually,
assuming a rate of return of 2% per year, federal and
provincial tax rate of 46% and the taxes are paid
from the investment account. (The savings increases
to approximately $44,000 if a 5% per year return is
assumed.)
TFSA versus contributing to an RRSP
You can further benefit by holding in your TFSA,
rather than personally, investments that would yield
highly taxed income (e.g., investments that pay
interest income and securities that pay foreign
dividends; although foreign withholding tax may
apply to the foreign source income).
Both a TFSA and an RRSP allow your investment to
grow tax-free as long as the funds remain in the
plan. With an RRSP, the contributions are taxdeductible, reducing the upfront cost of the
investment. Investment income earned in an RRSP
loses its character, so that when the income is
withdrawn from the RRSP, the income is taxed as
ordinary income, rather than at the preferential tax
rates for capital gains or dividends. Contributions to
a TFSA are not deductible for income tax purposes;
however, the original TFSA contributions and the
related investment income are not taxed, even when
the funds are withdrawn.
TFSA versus paying down mortgage on
a principal residence
Another form of investment is to pay down the
mortgage on your principal residence. Although you
are not acquiring an asset that can produce
investment income, reducing non-tax deductible
interest is a valid investment option. As well, gains
generated on your principal residence are not
subject to tax, making home ownership a taxeffective method of saving for Canadians.
Both mortgage repayments and contributions to a
TFSA are made with after-tax dollars. Because
income earned in a TFSA is not subject to tax, the
comparison of the potential rate of return earned in
a TFSA relative to the interest rate on the mortgage
will be a key consideration when deciding between
these alternatives.
Whether you use excess funds to pay down your
mortgage or to make another investment depends
on your specific situation. In particular, the relative
merits of paying down your mortgage on a principal
residence versus contributing to an RRSP have been
long debated and the introduction of the TFSA
complicates the issue.
If you contribute to an RRSP you will be entitled to
deduct the contribution from income, reducing your
tax payable for the year as well as the effective cost
of the contribution (i.e., amount contributed less the
tax savings). Investment income accumulates taxfree within the RRSP, but RRSP withdrawals are
subject to tax at your marginal tax rate. You can
make tax deductible contributions to a spousal
RRSP, which allows for income splitting with your
spouse when the funds are eventually withdrawn
from the RRSP. However, the significance of the
spousal RRSP is reduced by the pension-splitting
rules.
In addition, when you withdraw funds from an
RRSP, the contribution room is lost, and the funds
cannot be recontributed to an RRSP unless you
generate additional RRSP contribution room. Funds
withdrawn from your TFSA can be recontributed at
any time after the end of the year, while you are
resident in Canada.
TFSAs can also be a good supplement to RRSPs. You
can continue to contribute to TFSAs after the age
of 71, when RRSPs must be collapsed and any
payments from a TFSA will not affect your eligibility
for federal government assistance programs such as
old age security.
Further, you should compare your RRSP and TFSA
contribution limits. For example, an individual with
earned income (i.e., from employment) of $25,000 a
year who is not a member of a company pension
8
plan, will have a RRSP contribution limit of $4,500
($25,000 x 18%), which is less than the TFSA
contribution limit.
Appendix: Anti-avoidance
rules
Given the differences in the tax treatment of RRSPs
and TFSAs, the decision of whether to invest in an
RRSP or TFSA must be made case by case. There is
no one-size-fits-all solution.
This Appendix discusses the anti-avoidance rules
and penalties intended to deter investments in a
TFSA that are not qualifying investments (see
Qualifying investments on page 3) and
transactions that are considered abusive.
If you have contributed to both a TFSA and an
RRSP, after retirement you should consider first
withdrawing funds from your TFSA. In this way, the
funds in your RRSP can continue to grow before
having to be withdrawn on a taxable basis.
TFSA versus direct corporate share
ownership
A significant planning opportunity may exist if you
and persons not dealing at arm’s length with you,
together own less than 10% of a “specified small
business corporation.” Generally, a “specified small
business corporation” is a Canadian-controlled
corporation in which substantially all of the FMV of
the corporation’s assets is attributable to assets
that are:

used principally in an active business carried on
primarily in Canada; or

shares or debt of specified small business
corporations that are connected to the
corporation.
If these criteria are met, you can hold your shares in
the corporation in your TFSA. This would exempt
the dividends and capital gains from income tax
when earned by the TFSA and when withdrawn by
you. The rules are complex. Consult your PwC
adviser or any of the individuals on page 12 to
determine if you can take advantage of this planning
opportunity.
Non-qualified investments
A non-qualified investment is simply an investment
that is not a qualified investment. Non-qualified
investments cannot be held by a TFSA and are
subject to tax as follows:

FMV of non-qualified investments – 50% tax is
payable by the TFSA holder (see Table 5).

Income (including capital gains) on nonqualified investments – taxable to the TFSA at
the top personal tax rate (see Table 4).

Subsequent generation income on non-qualified
investments – see Specified non-qualified
investment income on page 9 and Table 4.
Prohibited investments
TFSAs are specifically prohibited from investing in
certain types of investments, referred to as
prohibited investments. These generally include:

loans (other than certain loans secured by a
mortgage) to the TFSA holder; and

shares/units or debt of:
i) a corporation, partnership or trust in which
the TFSA holder has a significant interest
(generally, 10% or more); or
ii) a person or partnership that does not deal at
arm’s length with: (a) the TFSA holder; or
(b) a person or partnership described in (i).6
The TFSA holder is subject to the following taxes on
prohibited investments:

FMV of prohibited investments – 50% tax (see
Table 5).

Income (including capital gains) on prohibited
investments – 100% tax under the “advantage”
rules (see Tables 4 and 5).
6. Draft legislative proposals released on December 21, 2012,
eliminate criteria (b) after March 22, 2011, in respect of
investments acquired at any time.
9
Advantage rules
An anti-avoidance rule imposes a 100% penalty tax
(see Table 5) if you or other non-arm’s length
persons have an advantage with respect to the TFSA.
This tax is intended to prevent transactions that are
designed to:

artificially shift taxable income away from you
into the shelter of a TFSA; or

circumvent the TFSA contribution limits.
Generally, an advantage is any benefit, loan or debt
that depends on the existence of the TFSA and may
include an increase in the FMV of the TFSA’s
property. Exceptions include TFSA withdrawals and
benefits from administrative or investment services
in connection with the TFSA or from loans and debt
on arm’s length terms and payments or allocations
to the TFSA by the issuer, such as reasonable
payments of bonus interest.
In particular, the advantage rules will tax an
increase in the FMV of property held in the TFSA
that is attributable to:

a transaction or event (or a series of
transactions or events):
 that would not have occurred in an open
market7 between arm's length parties; and
 one of the main purposes of which is to
enable the holder (or another person or
partnership) to benefit from the tax-exempt
status of the TFSA; and

a payment received in substitution for:
 services rendered by the holder or a person
not at arm's length with the holder; or
 a return on investment, or proceeds of
disposition, for property held outside the
TFSA by the holder or a person not dealing
at arm's length with the holder.
Swap transactions
Swap transactions (also called asset-transfer
transactions) are caught by the advantage rules too.
In general, a swap transaction is a transfer of
property (other than a contribution or withdrawal)
7. Draft legislative proposals released on December 21, 2012,
replace the reference to “an open market” with “a normal
commercial or investment context,” retroactive to March 23,
2011.
between the TFSA and the TFSA holder (or a person
with whom the TFSA holder does not deal at arm’s
length).
The increase in the FMV of property that is
attributable to the swap transaction is subject to a
100% penalty tax under the advantage rules. See
Table 5.
Deliberate over-contributions
A deliberate over-contribution is a contribution to a
TFSA that results in, or increases, an excess
contribution. An exception applies if it is reasonable
to conclude that the individual neither knew nor
should have known that the contribution could
result in a liability.
The TFSA holder is subject to the following taxes on
deliberate over-contributions:
 1% per month penalty tax on excess
contributions (see Table 5).

Income (including capital gains) attributable to
deliberate over-contributions – 100% tax under
the advantage rules (see Tables 4 and 5).
Specified non-qualified
investment income
Specified non-qualified investment income is the
income (including capital gains) attributable to an
amount that is taxable to a TFSA (e.g., subsequent
generation income earned on non-qualified
investment income or on income from a business
carried on by a TFSA).
The Minister may require the specified nonqualified investment income to be distributed within
90 days of receipt by the holder of the notice.
If the specified non-qualified investment income
has:

not been distributed by the TFSA within 90 days
after receiving notification from the Minister 100% tax is payable on the income by the TFSA
holder under the advantage rules; or

been distributed – it is taxable to the holder.
See Tables 4 and 5.
10
TFSA income subject to tax
The taxation of TFSA income is outlined in Table 4.
Table 4 — Taxation of TFSA income
Treatment for tax purposes
qualifying investments
Income on
prohibited investments1
deliberate over-contributions
not distributed
Specified non-qualified
investment income2
distributed
excess contributions
Income
distributed on3
non-resident contributions
Distribution of an advantange3
excess contributions
Income not
distributed on4
non-resident contributions
non-qualified investments1
Income from
Exempt from tax
Who pays tax
N/A
100% tax as an advantage — see Table 5
Taxable at holder’s marginal income tax rate
TFSA holder
100% tax as an advantage — see Table 5
The TFSA trust is taxed at the top personal income tax rate.
Income subject to tax from these investments includes:
carrying on a business5  capital dividends (these are fully taxable); and
 the full amount of capital gains, net of capital losses (the 50%
inclusion rate does not apply).
TFSA
1. An investment that is both non-qualified and prohibited will be deemed to be a prohibited investment only.
2. The advantage rules apply to specified non-qualified investment income that has not been distributed by the TFSA within 90 days
after receiving notification from the Minister. If the income is distributed, it will be taxable to the TFSA holder.
3. The distribution is taxable to the TFSA holder if the Minister waives the 1% per month tax on the excess contribution, the 1% per
month tax on the non-resident contribution or the 100% tax on the advantage, as applicable. See Table 5.
4. Assuming the excess or non-resident contribution is created by a deliberate over-contribution, income on the deliberate overcontribution will be subject to the 100% tax under the advantage rules.
5. The tax effectively prevents a TFSA from carrying on a business.
11
TFSA penalty taxes
Table 5 summarizes the penalty taxes that can apply to TFSAs
Table 5 — TFSA penalty taxes
1
Penalty tax
Excess
contributions2
1% per month
on excess
contributions
Non-resident 2
contributions
1% per month
on contributions
made by
non-residents
Non-qualified
50% of FMV of
investments
non-qualified or
prohibited
Prohibited
property3
investments
Income on prohibited
investments4
Income on deliberate
100% tax on
over-contributions
income as an
advantage
Specified
non-qualified
5
investment income
TFSA holder has
an advantage
Swap
transactions
100% tax on
FMV on the
advantage or
on amount of
loan or debt
100% of
increase in
FMV taxable as
an advantage
Explanations
This tax applies to the highest excess contribution in each
month. It is similar to the penalty tax on excess RRSP
contributions. However, while a $2,000 margin for error is
permitted for RRSP excess contributions, every dollar of
TFSA excess contributions will be penalized.
You will be subject to the 1% per month tax until the
excess contributions are withdrawn or new contribution
room earned in subsequent years eliminates the excess
contribution. Deliberate over-contributions increase or
create excess contributions.
You will be subject to the 1% per month tax until the
contributions are withdrawn or you resume Canadian
residence (whichever is earlier).
This is a one-time tax that becomes payable when the
TFSA acquires the prohibited or non-qualified investment
or a previously acquired investment becomes prohibited
or non-qualified.
The income that is subject to the penalty tax includes:
 the actual amount of dividends received (the dividend
tax credit rules do not apply);
 capital dividends (these are fully taxable); and
 the full amount of capital gains, net of capital losses
(the 50% inclusion rate does not apply).
The amount of tax is equal to the:
 FMV of the benefit;
 amount of the loan or indebtedness; and/or
 increase in the FMV of the property as a result of the
“advantage.”
The tax applies on the increase in the FMV of property
that is attributable to the swap transaction.
When Minister may waive the tax
If the contributions arose because of a
reasonable error and you withdraw
them without delay. The distribution
cannot be less than the full amount of
the:
 excess contribution and income
(including capital gains) attributable to
it; and/or
 non-resident contribution and income
(including capital gains) attributable to
it.
If it is just and equitable to waive the tax
having regard to all the circumstances,
including:
 whether the tax arose as a
consequence of reasonable error;
 the extent to which the transaction that
gave rise to the tax also gave rise to
another tax; and
 the extent to which payments have
been made from the TFSA.
Effective March 23, 2011, draft
legislative proposals released on
December 21, 2012:
 add the third bullet above; and
 repeal the requirement that a waiver
for tax in respect of an “advantage”
could be obtained only if one or more
payments are made “without delay”
from the TFSA and the total payment is
not less than the tax liability that is
waived.
1. Penalty taxes are imposed on the TFSA holder, except for certain cases involving a TFSA “advantage,” when the TFSA issuer may be liable.
You must file Form RC243 E “Tax-Free Savings Account (TFSA) Return” (and RC243-SCH-A-Excess TFSA Amounts and/or RC243-SCH-BNon-resident Contributions to a Tax-Free Savings Account (TFA)) and remit the penalty taxes by June 30 of the following year. (Upon royal
assent, draft legislative proposals released on December 21, 2012, extend the deadline from 90 days after the calendar year.) If an individual
dies before the due date, the deadline will be the later of the normal due date and six months after the date of death.
2. In addition to the 1% per month tax on contributions made while a non-resident, you may also be subject to the 1% per month tax on excess
contributions if the non-resident contribution creates an excess contribution.
For purposes of the 1% per month tax on excess contributions and the 1% tax on non-resident contributions, contributions exclude:
 transfers from another TFSA of the TFSA holder; and
 certain transfers to the TFSA on the TFSA holder’s death (see Death of TFSA holder on page 3) on a marriage breakdown (see Marital
breakdown page 5).
In addition, for purposes of the 1% per month tax on excess contributions, withdrawals exclude:
 transfers to another TFSA of the TFSA holder;
 certain transfers from the TFSA on a marriage breakdown (see Marital breakdown page 5); and
 a distribution of:
 an advantage (see Advantage rules on page 9);
 specified non-qualified investment income (see Specified non-qualified investment income on page 9);
 income that is taxable in a TFSA trust (see Table 4); and
 income earned on excess contributions or on non-resident contributions that are taxable to the TFSA holder (see Table 4).
3. The Minister can refund the 50% tax on non-qualified investments and prohibited investments if the TFSA disposes (or is deemed to dispose)
of the non-qualified or prohibited investment before the end of the calendar year following the calendar year in which the tax arose (or at a later
time that the Minister considers reasonable). However, no refund is available if it is reasonable to expect that you knew or should have known
that the property was, or would become non-qualified or prohibited.
If the investment ceases to be a non-qualified or prohibited investment, the TFSA will have a:
 deemed disposition of the property immediately before the change in status; and
 deemed reacquisition immediately after the change in status,
for the property’s FMV at that time.
4. An investment that is both non-qualified and prohibited will be deemed a prohibited investment only. Therefore, income on the prohibited
investment will be subject to the 100% tax as an advantage. For the taxation of income from non-qualified investments, see Table 4.
5. The advantage rules apply to specified non-qualified investment income that has not been distributed by the TFSA within 90 days after
receiving notification from the Minister. If the income is distributed, it will be taxable to the TFSA holder (see Table 4).
12
We can help
For more information about how you can make the most of TFSAs, please contact your PwC adviser or
any of the individuals listed below.
Calgary
Nadja Ibrahim
403 509 7538
[email protected]
Edmonton
Kent Davison
780 441 6878
[email protected]
Halifax
Dean Landry
902 491 7437
[email protected]
Hamilton
Beth Webel
905 972 4117
[email protected]
London
Kevin Robertson
519 640 7915
[email protected]
Mississauga
Jason Safar
905 949 7341
[email protected]
Montreal
Daniel Fortin
514 205 5073
[email protected]
North York
Bruce Harris1
416 218 1403
[email protected]
Ottawa
Brenda Belliveau
613 755 4346
[email protected]
Quebec City
418 691 2436
[email protected]
Saint John
Jean-Francois Drouin
DrDDrouinDrouin
Scott Greer
506 653 9417
[email protected]
St. John's
Darrin Talbot
709 724 3646
[email protected]
Saskatoon
Erick Preciado
306 668 5913
[email protected]
Toronto
Ken Griffin
416 218 1512
[email protected]
Vancouver
David Khan
604 806 7060
[email protected]
Waterloo
Mark Walters
519 570 5755
[email protected]
Windsor
Giancarlo Di Maio
519 985 8911
[email protected]
Winnipeg
Dave Loewen
204 926 2428
[email protected]
York Region,
Ontario
Wilson and
Susan Farina
905 326 5325
[email protected]
Jillian Welch1
Manjit Singh
416 869 2464
416 365 8160
[email protected]
[email protected]
Partners
LLP2
1. Member of PwC's Canadian National Tax Services (see www.pwc.com/ca/cnts).
2. A law firm affiliated with PwC Canada (see www.wilsonandpartners.ca).
How much tax do you owe?
Use our Income Tax Calculator for Individuals to estimate your 2012 tax bill and marginal tax
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