The Tax Free Savings Account (TFSA) is a great tool for Canadians to save and accumulate wealth. It appears that in the last several years that the CRA is increasingly auditing TFSA holders’ accounts and has issued warnings on misuse of the TFSA. First I’ll talk about what a TFSA is in case you aren’t aware, but then let’s get into how you can avoid a knock on the door from CRA wanting to slap your hand.
Starting in 2009 – Canadians were allowed to put money into a TFSA. A TFSA can be like a regular savings account or can look very much like an RRSP in that you can invest into the market and various funds, stocks, bonds, etc. You are allowed to currently contribute $6,000 per year and the maximum cumulative amount you can contribute as of 2021 is $75,500. Growth inside is non-taxable, and anything you pull out during a given year can be re-contributed in the following year. Like I said – a great account that is really flexible.
TFSA misuse has been on the CRA’s radar and they’ve been fairly aggressive in pursuing it lately. There are several things you need to be aware of to remain onside with your account such as:
Overcontributing – over contributing will get you penalized 1% of the excess amount per month until you pull that money back out. Most of the time this is an innocent mistake and happens more often when people have more than 1 TFSA at different institutions. There is no wiggle room for over-contributing to a TFSA, which is in contrast to the RRSP that only begins penalizing once you’ve over contributed by $2,000.
Making a contribution as Non-Resident – Canadians who are currently residing out of the country can open a TFSA and maintain current ones, but they cannot contribute to a TFSA while non-resident. Learn more here
Day-Trading in your TFSA – This is a big one that everyone should be aware of with the increased popularity of trading your own stocks. If you trade inside of your TFSA too frequently the CRA could take the view that you’re carrying on a business inside your account which would make all the investment income such as dividends, interest, and gains subject to tax. Periodic adjustments to your portfolio are to be expected but multiple trades per day could put you in the hot seat. The CRA has also mentioned they look for other factors as well to determine your day trader status, such as your knowledge of securities markets, how much research you’ve done on investments, as well as your history of holding securities for short durations.
Hope you found this helpful – if you did feel free to share it!
– Jon Corrigan, CFP, CLU
