Your Questions re Tax-Free Savings Accounts (TFSA)

Q:

Can a corporation hold a Tax Free Savings Account (TFSA)?

A:

Legislation provides that an individual (other than a trust) who is resident in Canada and 18 years of age or older would be eligible to establish a TFSA.  S. 248 of the Income Tax Act defines an individual as a person other than a corporation.  Thus, a corporation is not be eligible to establish a TFSA.

Q:

What slips are associated with a TFSA?

A:

At this time the only form that has been provided for a TFSA is Form RC236 Application for a TFSA (Tax-Free Savings Account) Identification Number.  This form is for use by the issuers of a TFSA.  No forms have been announced for use by individuals.

CRA has announced that it will provide taxpayers the amount of the available TFSA contribution room each year on their Notice of Assessment, based on information provided by the issuers of the TFSA.  CRA has also indicated that taxpayers will have to file returns in order to establish their contribution room.

In addition, the CRA has provided details of the information that TFSA issuers must provide each year.  These details include:

• Name, date of birth, and Social Insurance Number of plan holder,
• TFSA Account Number,
• Details of each contribution, withdrawal, transfer in, and transfer out,
• Fair Market Value of the plan at December 31 of the taxation year.

The deadline for the issuers to file their TFSA returns is 60 days after the end of the taxation year.

Given that contributions are not deductible and withdrawals are not taxable, it may well be that there will be no reporting requirements by the individual plan holder.  However, CRA has not made its intention clear in this respect.  CRA has confirmed that there will not be a prescribed form for transfer of TFSA amounts between financial institutions.

Q:

Can a Flow-Through Limited Partnership be held within an RRSP? Within a TFSA?

A:

The same rules apply to an RRSP and TFSA.  There are no specific restrictions in the Income Tax Act for flow-through shares or limited partnerships that invest in flow-through shares from being held within an RRSP or TFSA, so long as they are listed on a prescribed stock exchange in Canada.  Typically, flow-through shares will not be publicly traded during the first 18-24 months and will then be rolled over into a mutual fund that is publicly traded.  During the period that the flow-through shares are not publicly traded, they are not eligible RRSP or TFSA investments.

Caution should also be exercised when considering flow-through shares (or limited partnerships that invest in flow-through shares) in either an RRSP or a TFSA.  Since neither an RRSP nor a TFSA can benefit from the flow-through expenses, it may not make sense to purchase the flow-through shares in an RRSP or TFSA. 

Investors may consider whether it is a good idea to transfer those shares or partnership units into their RRSP or TFSA after they have deducted the flow-through deductions.  If the shares are traded on a prescribed exchange, such a transfer will result in a deemed disposition for income tax purposes at the fair market value (FMV) of the shares.  The adjusted cost base of the shares will be zero so the entire FMV of the shares will be reported as a capital gain.

If the shares or units increase in value the capital gain within the TFSA will be tax-free.  If they decrease in value, then the loss will not be deductible.  Given the tax-preferred treatment of capital gains, investors should consider whether a registered account is really the best place to hold such investments.  On the other hand if the investor feels that the investment will yield fully-taxable income, then the tax-free status of the TFSA or tax-deferred status of the RRSP may be beneficial.