Tax Season is Over But Tax Changes Abound For Investors

New Penalties for TFSA Abusers. Although Tax-Free Savings Accounts are fairly new, many have found ways to abuse it. The Department of Finance has moved quickly to stop those abuses with penalty provisions which will be effective for TFSA transactions occurring after October 16, 2009:

• Excess Contributions. When taxpayers make contributions over the allowed maximum, they are subject to a 1% per month penalty until the amounts are removed. However, if taxpayers are willing to pay the penalty tax in order to keep the money in the plan, hoping to reap an even higher tax-free return on the excess contribution, 100% of the gains will be subject to tax when deliberate overcontributions occur after October 16th, 2009.
• TFSA Eligible Investments. The same eligible investments as allowed within an RRSP will apply to the TFSA. A special rule will prohibit a TFSA from making an investment in any entity with which the accountholder does not deal at arm's length, and for occurrences after October 16th, 2009, a 100% penalty tax on the income so earned will apply.
• Swapping for Tax-Free Gains. When taxpayers swap investments from non-registered accounts for cash in the TFSA, and then swap them back out for a revised, higher price point, thereby leaving gains in the TFSA to be tax free, 100% of the gains are subject to tax, after October 16th, 2009.

The CRA has also issued a form and two related schedules to calculate the taxes and penalties imposed on excess contributions or prohibited or non-qualified investments.  The TFSA return and any related payments are due by June 30th in the year following the end of the calendar year.

• RC243 Tax-Free Savings Account (TFSA) Return 2009
• RC243-SCH-A Schedule A - Excess TFSA Amounts
• RC243-SCH-B Schedule B - Non-Resident Contributions to a Tax Free Savings Account (TFSA)

Educational Resources: For more information on tax planning provisions and compliance requirements subscribe to The Knowledge Bureau's online tax reference for taxpayers, financial advisors and their clients: EverGreen Explanatory Notes.