Taxman crackdown means TFSA rules could change
TORONTO A Canada Revenue Agency crackdown on tax-free savings accounts has some people wondering whether TFSAs will always be shielded from a federal government that might be looking to generate cash.
Phillip Cross, a senior fellow at the C.D. Howe Institute and the former chief economic analyst with Statistics Canada, said Tuesday any attempt to claw back money from the TFSAs of Canadians would probably be driven by need.
“I’ve seen estimates that the government deficit without any changes in spending programs will increase by six per cent per year because of the aging of the population,” Cross said. “The hunt will be on to boost revenue. There is reason to be concerned about the long-term sustainability of some of these programs that shelter income from taxes.”
The TFSA was launched in 2009 and Canadians can now contribute $5,500 annually and have the money grow inside the account tax-free, to be withdrawn without penalty. There has never been a suggestion from the government that it would ever tax money coming out of the accounts.
But tax and legal sources have confirmed to the Financial Post that the Canada Revenue Agency has created an audit project to investigate Canadians who have had a lot of transactions in their TFSAs and now have large balances, suggesting those people are effectively in the business of trading. But the CRA says it is taking a “closer look” at a very small percentage of accounts, “less than 0.0001 per cent of all TFSAs,” to make sure they comply with the spirit of the legislation.
“Individuals that have used TFSA provisions to avoid taxes on otherwise taxable income will be challenged,” the CRA said Tuesday in an email response to the Financial Post.
TFSAs have become increasingly popular with Canadians. The federal department of finance, in its most up-to-date statistics, said 8.2 million Canadians had invested $62 billion by the end of 2011. Individuals with income of less than $80,000 accounted for 80 per cent of all TFSA holders.
“I wouldn’t say governments are above double taxation, it seems to be one of their favourite things,” Cross said about the idea the government could ever go after contributions made to TFSAs, which come from after-tax income.
“It plays a lot better with Canadians if you say you are just closing
There is reason to be concerned about the long-term sustainability of some of these programs that shelter income from taxes.
down loopholes.”
Finn Poschmann, vice-president of policy analysis with the C.D. Howe Institute, said beyond the politics of a government reversing course, any taxing of TFSAs would also likely face a legal battle if it made any taxation retroactive by going after existing balances.
He said the rules on the TFSAs and what you can and can’t do inside one should end up eventually following the practice of what has happened with RRSPs. “Everyone knows you cannot run a business through your RRSP,” said Poschmann. “The TFSAs are new but the concept that you cannot run a business through a private taxexempt structure is not new.”
Poschmann said the rules in other jurisdictions for similar accounts, like the Individual Savings Account in the United Kingdom, are more restrictive. “They said these are going to be the rules for the first 10 years with no promises after that,” he said.
Fred Vettese, chief actuary of Morneau Shepell, has already pointed out a loophole around the Guaranteed Income Supplement that allows wealthy Canadian seniors to continue to collect it as long as they are deriving income exclusively from their TFSA because the withdrawals are not considered for the GIS income-testing.
“It will be very difficult for any government to eliminate the TFSA but the most likely action is the government will study (the TFSA) further to decide whether they want to lift the limit,” Vettese said.
The Conservatives have pledged to double the amount Canadians can contribute to TFSA annually once the budget is balanced, which is something the government is on pace to do. At the time of the pledge, the annual contribution was $5,000 but indexing to inflation, doubling would take that figure to $11,000.
“I think they are going to hold off on this until they give it a rethink,” Vettese said, adding that the government might add a means test based on assets to determine whether people can collect GIS by using their TFSAs.