2018-0774901E5 Realization on TFSA as security for debt

Principal Issues: (1) Whether a payment from a TFSA to a creditor is a "distribution" as this term is defined in subsection 146.2(1) of the Act. (2) If considered a distribution, would the amount be added back to the individual's TFSA contribution room for the following year?

Position: (1) Yes.

Reasons: (1) The payment is considered a "distribution" under a TFSA as it is a payment in satisfaction of all or part of the holder's interest in the arrangement. (2) The amount would be added back to the individual's TFSA contribution room for the following year pursuant to variable “C” in the formula in the definition of “excess TFSA amount” in subsection 207.01(1) of the Act.

Author: Podor, Karina
Section: 146.2; 207.01

XXXXXXXXXX                                                                  2018-077490
                                                                                          K. Podor
September 30, 2019

Dear XXXXXXXXXX:

Re:   Realization on TFSA given as security for debt

This is in reply to your email of August 21, 2018 in which you describe a situation where an individual pledged their interest in a tax-free savings account (“TFSA”) as security for a debt in accordance with subsection 146.2(4) (footnote 1). The creditor subsequently realizes on the security and the TFSA issuer makes a payment from the TFSA to the creditor in satisfaction of the security.

You request that we confirm that the payment constitutes a distribution under the TFSA and therefore added back to the individual’s TFSA contribution room for the following year. We apologize for the delay in our reply.

Our comments

This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R9, Advance Income Tax Rulings and Technical Interpretations.

Subsection 146.2(1) defines the term “distribution” for the purposes of the rules for computing TFSA contribution room in Part XI.01 to mean a payment out of or under a TFSA in satisfaction of all or part of the holder’s interest in the TFSA.

We agree with your view that, in the above scenario, the payment from the TFSA to the creditor constitutes a distribution under the TFSA. Consequently, the amount of the payment would be added back to the individual’s TFSA contribution room for the following year pursuant to variable C in the formula in the definition “excess TFSA amount” in subsection 207.01(1).

We trust these comments will be of assistance.

Yours truly,

Dave Wurtele
Section Manager
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader:  Because of our system requirements, the footnotes contained in the original document are shown below instead:

1  Unless otherwise stated, all statutory references in this document are to the Income Tax Act (the “Act”).

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