CRA News: Advantage Rules for Investments & 2019 TFSA Limits

Two new important pieces of information from the CRA impact the registered investment strategies of Canadian taxpayers. The forecasted TFSA contribution limits for 2019, and the long-awaited Income Tax Folio S3-F10-C3, Advantages – RRSPs, RESPs, RRIFs, RDSPs and TFSAs issued on October 1.

TFSA Contribution Room

The CRA is not expected to announce additional TFSA contribution room for 2019 for a couple of months yet, but it will almost certainly increase to $6,000. 

The Income Tax Act specifies the limit at $5,000 for 2009, to be indexed by increases in the Consumer Price Index. However, the actual contribution room is rounded to the nearest $500.

With the exception of 2015 when the limit was temporarily raised to $10,000, the additional contribution room earned each year remained at $5,000 until 2013 when the indexed amount reached $5,348.  As of 2018, the indexed amount was $5,721. To reach the tipping point of $5,750, the CPI has to increase by 0.5 percent.  With inflation currently running close to 3.0 percent the indexed amount is expected to be $5,864 (assuming a conservative 2.5 percent inflation rate). This is well over the required $5,750 to increase the limit to $6,000.

Below is the history of the indexed, actual, and cumulative contribution limits since the plan was introduced:

Income Tax Folio S3-F10-C3, Advantages – RRSPs, RESPs, RRIFs, RDSPs and TFSAs

In this new folio, they detail activities that will result in huge penalties if included in a taxpayer’s registered investment strategy.

An advantage is some benefit related to the registered plan that was not intended by the legislation that created the plan. An advantage may be:

1. A benefit conferred upon the planholder* as a result of the existence of the plan. An example cited in the folio is a discount on services provided to an investor because of an investment held in his RRSP.

2. An increase in the fair market value of plan assets that may be attributed to transactions such as:

• Transactions that would not have occurred in normal circumstances between arm’s length parties and one of the reasons for the transaction** is to benefit from the tax-exempt status of the plan.
• Payment for services by the planholder* or related to an investment held outside the plan by the planholder.*
• A swap transaction (transfer of assets of the plan to the planholder* in exchange for another asset), except under certain circumstances (e.g., in order to remove a non-qualifying investment from the plan).
•  Specified non-qualifying investment income that has not been removed from the plan within 90 days of the planholder* receiving notification to remove the income.

3. Income or gains in the plan related to:

• A prohibited investment.
• An artificial diversion of an amount away from a registered plan (other than a TFSA). An example cited as an artificial diversion are rebates available in a multiple investment account environment where the rebates are not allocated on a pro-rata basis.
• Deliberate over-contributions to a TFSA with the intention of earning a rate of return in excess of the 1 percent per month penalty for making the over-contribution.

4. A registered plan strip. A strip is a reduction in the fair market value of the assets in a plan (other than a TFSA) where the reduction is the result of a transaction** whose main purpose is to generate a benefit to the planholder* as a result of the reduction in the value of the assets of the plan.

The penalties for any of the above advantages is a tax of 100 percent of the fair market value of any benefit, the amount of any loan that resulted in an advantage, or the amount of the registered plan strip.

Any taxpayer who is subject to the advantage tax must file Form RC339, Individual Return for Certain Taxes for RRSPs, RRIFs, RESPs or RDSPs, or Form RC243, Tax-Free Savings Account (TFSA) Return. If the advantage is extended by an issuer, carrier or promoter, they are liable for an advantage tax as well and must file Form RC298, Advantage Tax Return for RRSP, TFSA or RDSP Issuers, RESP Promoters or RRIF Carriers. All these returns are due by June 30 of the year following the year in which the advantage occurred. If the return is filed late, the standard late filing penalties apply: 5% of the balance due plus one percent per month for each complete month the return is late.  Penalties are doubled for chonic late filers.

The folio also warns that, although third parties may not be liable for the advantage tax, CRA will impose third-party penalties to issuers, carriers, and promoters who “knowingly facilitate the holding of, or participate in, such investments or transactions.”

*Note that in all of the above, the planholder includes anyone who does not deal at arm’s length with the planholder.
**A transaction includes a series of transactions.

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