Canadian Retirement Resources

Today’s story on the Canada Revenue Agency’s audits of 6-figure TFSAs was originally scheduled for the Saturday paper but when it was moved ahead a day, I wasn’t able to include the answers to four questions I had posed to the CRA.

“Tax cheats” must not gain “unfair advantage”

Late this afternoon, I received two communiques to my queries posed Thursday. One was the following short statement from a spokesperson for National Revenue Minister Gail Shea:

Our government built on our aggressive tax relief by introducing the landmark TFSA, the most important personal savings vehicle since the RRSP.  Nearly 7 million Canadians have taken advantage of this new option. The vast majority are in compliance with the law, and the overwhelming majority of Canadians will not be affected.

However, as with all investment vehicles, CRA has a responsibility to protect the tax base and ensure tax cheats do not gain an unfair advantage. Our Government’s expectation is that CRA aggressively pursue cases where individuals have taken part in schemes that violate the Income Tax Act.

A second longer email included the answers, or sort of answers. to the four questions I had posed:

On October 16, 2009, the Minister of Finance proposed amendments to the legislation to address concerns that arose at the time regarding the use of Tax-Free Savings Accounts in tax-planning schemes. The proposed amendments were enacted effective October 17, 2009.  CRA routinely conducts risk assessment and compliance activities of TFSAs to ensure compliance with the Income Tax Act.

Any potential audit would consist of a review of the transactions that took place within a TFSA. These transactions may, for example, be identified as being swap transactions, and as such, may be liable to a special tax referred to as a tax on advantage. The tax on advantage is intended to prevent transactions designed to artificially shift taxable income away from the holder of the TFSA and into the shelter of the TFSA or to circumvent the TFSA contribution limits.

Please refer to point 6 below for more information concerning the special taxes related to TFSAs.

In regard to your other queries:

1.       How large does a TFSA attract the CRA’s notice, and triggers a request for a questionnaire? (I’m told some TFSAs under attack are north of $100,000).

The CRA applied risk assessing factors to the entire TFSA population, and those with the highest level of risk were subject to an audit.

2.       Were these loopholes addressed on Oct 17, 2009 when the government prohibited the kind of swap transactions that make such huge rises in TFSAs possible?

On October 16, 2009, the Minister of Finance proposed amendments to the legislation to address concerns that arose at the time regarding the use of TFSAs in tax-planning schemes. The proposed amendments were enacted effective October 17, 2009.  The CRA routinely conducts risk assessment and compliance activities of TFSAs to ensure compliance with the Income Tax Act.

3.       How many questionnaires have been sent out?  How many audits proceeding?

Every TFSA that is considered to have a high risk factor may be subject to compliance activities.  The vast majority of TFSA holders are compliant with the law, and only those who have pursued aggressive tax planning schemes are likely to be subject to further activities.

4.       What are the penalties if prosecuted?

Unless a taxpayer is charged with a criminal offence, there are no prosecutions involved.

The audits underway are civil audits of TFSAs that may result in the assessment of a special tax related to TFSAs.

The following taxes may be applicable to a holder of a TFSA:

i)         Tax payable on excess TFSA amount – taxpayers may contribute $5,000 into a TFSA each calendar year starting in 2009. Any outstanding contribution room is carried over to the subsequent year. If a taxpayer contributes more than the limit for the year, they are subject to a tax of 1% of the excess amount contributed.
ii)       Tax payable on non-resident contributions – if a non-resident makes a contribution, they are subject to a tax of 1% of the contribution.
iii)      Tax payable on prohibited or non-qualified investment – if a taxpayer invests in a property that is deemed to be prohibited (eg. the taxpayer invested in shares of a corporation that he owned at least 10% of) or non-qualified (it does not meet the definition of a qualified investment), they are subject to a tax of 50% of the value of that property when it became a prohibited or non-qualified investment. This tax may be refundable if the taxpayer disposes of the property in question.
iv)      Tax payable in respect of advantage – a taxpayer may be subject to a tax of 100% of the value of:
a.       Any benefit, loan or indebtedness that is conditional on the existence of the TFSA, with certain exceptions;
b.      A benefit that is an increase in the fair market value of property held in connection with a TFSA where it is reasonable to conclude that the increased value is attributable to certain events or circumstances, including swap transactions; and
c.       Income that is attributable to an over-contribution or to a prohibited investment.

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