The federal government is proposing amendments to the Income Tax Act to strengthen the rules applicable to Tax-Free Savings Accounts (TFSAs).

The TFSA was introduced in the 2008 federal budget. Since Jan. 1, 2009, Canadian residents who are 18 years of age or older are eligible to contribute up to $5,000 annually to a TFSA. Contributions to a TFSA are not tax-deductible, but investment income earned in a TFSA, as well as TFSA withdrawals, are tax-free.

The amendments proposed Friday respond to recent concerns that have arisen regarding the use of TFSAs in tax-planning schemes, the government said.

The proposed amendments would:

• make any income attributable to deliberate overcontributions and prohibited investments subject to existing anti-avoidance rules in the Income Tax Act;
• make any income attributable to non-qualified investments taxable at regular income tax rates;
• ensure that withdrawals of deliberate overcontributions, prohibited investments, non-qualified investments or amounts attributable to swap transactions, or of related investment income, from a TFSA do not create additional TFSA contribution room; and
• effectively prohibit asset transfer transactions between TFSAs and other accounts.

The government said it would introduce legislation at an early opportunity.

“These proposals will ensure that the TFSA remains viable and strong for Canadians today and in the future and the use of inappropriate transactions to draw excessive benefits are avoided,” federal finance minister Jim Flaherty said in a release.

As with the existing TFSA legislation, the Minister of National Revenue will maintain, in appropriate circumstances, the discretion to waive or cancel all or part of any tax that would otherwise be payable because of the application of Friday’s proposals.

Flaherty has asked revenue minister Jean-Pierre Blackburn to ensure that the Canada Revenue Agency closely examines any unusual TFSA transactions that have occurred to date, and to apply the existing TFSA rules to challenge aggressive tax planning where appropriate.

IE