2020-0843071E5 TFSA - Deliberate Over-contributions

Principal Issues: What are the tax consequences of making a deliberate over-contribution to a TFSA?

Position: 1% tax per month on the excess TFSA amount and 100% advantage tax on any income and capital gains attributable to the deliberate over-contribution (less the 1% tax payable).

Reasons: Application of the law.

Author: Odubella, Darren
Section: Subsection 207.01(1) definitions of advantage, deliberate over-contribution, and excess TFSA amount; section 207.02; section 207.05; section 207.062

XXXXXXXXXX                                                                                                  2020-084307 
                                                                                                                          D. Odubella
July 14, 2020

Dear XXXXXXXXXX:

Re:  Tax-Free Savings Account (TFSA) - Deliberate Over-contributions

We are writing in response to your letter of March 5, 2020, in which you enquired about the income tax consequences for an individual who intentionally makes a TFSA contribution in excess of their available contribution room. You also asked us to cite the applicable provisions of the Income Tax Act (“Act”).

Our comments

This technical interpretation provides general comments about the provisions of the 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.

Section 207.02 (footnote 1) provides that an individual who makes a contribution to a TFSA that exceeds their contribution limit is subject to a 1% tax on the excess. The tax is calculated monthly, based on the individual’s highest “excess TFSA amount” for that month, as defined in subsection 207.01(1). The 1% tax continues to apply for each month that the excess TFSA amount remains. The individual may take action to correct an over-contribution and minimize the tax by making one or more withdrawals from their TFSA to reduce or eliminate the excess TFSA amount. New TFSA contribution room that becomes available each year will also serve to reduce an excess TFSA amount. There is no requirement to remove any income or capital gains that are attributable to an excess TFSA amount, except in two situations.

The first situation is where the Minister agrees to waive or cancel the 1% tax pursuant to subsection 207.06(1). As a condition for the Minister to grant the waiver, the individual must withdraw from their TFSA an amount sufficient to eliminate the excess TFSA amount, together with any associated income and capital gains. The portion of the withdrawal relating to the investment earnings is included in the individual’s income under Part I in accordance with paragraph 12(1)(z.5) and section 207.061.

The second situation is where the over-contribution is determined to be a “deliberate over-contribution,” as defined in subsection 207.01(1). A deliberate over-contribution refers to a TFSA contribution knowingly made by an individual in excess of their TFSA contribution limit, generally with a view to generating a rate of return sufficient to outweigh the cost of the 1% tax. Any income or capital gains reasonably attributable, directly or indirectly, to a deliberate over-contribution constitute an “advantage” pursuant to subparagraph (c)(iii) of the definition “advantage” in subsection 207.01(1). The individual is subject to a 100% tax on the advantage under section 207.05 (less the amount of 1% tax payable by the individual in respect of the over-contribution, as provided by the special limit in section 207.062). The advantage tax continues to apply until the individual withdraws the deliberate over-contribution and the associated income and capital gains from their TFSA. Whether an over-contribution is a deliberate over-contribution is a question of fact that can only be determined by a detailed review of the facts. However, the CRA closely examines any unusual TFSA transactions and will challenge aggressive tax planning where appropriate.

Additional information on the reporting and filing requirements for an individual liable for tax in connection with TFSA over-contributions is provided in Guide RC4466, Tax-Free Savings Account (TFSA), Guide for Individuals.

We trust our comments will be of assistance.

Yours truly,

for Mary Pat Baldwin, CPA, CA
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 as otherwise stated, all legislative references in this document are to the Act.

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