Less than 1 year into the life of Canada’s newest tax shelter, the Canadian government has already decided to make changes in an attempt to close up some loopholes. The intention is to stop transactions involving TFSAs that violate the spirit of the program, which is intended for Canadians to bolster their personal savings by offering an easy-to-access tax sheltered savings vehicle. The proposed changes primarily address 3 main loopholes in the existing program.
Loophole #1: Deliberate Over-Contributions
The new regulations are in part targeted towards investors making deliberate over-contributions on the grounds that their tax-free gains would exceed the associated 1% per month penalty. In the future, any income reasonably attributed to over-contributions will be subject to a 100% tax which should certainly stop these investors in their tracks. With incremental gains going to the tax man, paying 1% per month becomes a losing strategy no matter how well over-contributed funds are invested.
Loophole #2: RRSP Meltdown Strategy
The proposed rule changes will also put an end to a loophole allowing investors to avoid taxes by moving funds out of an RRSP (taxable at redemption) and into a TFSA account (tax free withdrawal). While this would be a slow strategy in 2009, this loophole threatened to become increasingly lucrative as TFSA balances inevitably rise year after year. Going forward TFSA amounts reasonably attributed to these type of transfers will be taxed at 100%.
Loophole #3: Unqualified Investments
The third loophole addressed by the proposed changes relates to unqualified investments. Property or corporate investments in which the account holder has a significant stake were being used despite the current penalties. Gains remained in the accounts after unqualified purchases were removed, thus sheltering the gains from tax. As with the other 2 loopholes, any gains in this domain will be taxed at 100%, while any secondary income related to unqualified investments will be taxed as regular income.
Making the Most of Your Tax Free Savings Account in 2010
So, now that some of the loopholes have been closed, we’re back to the original spirit of the TFSA program; bolstering our savings accounts. With interest rates currently running at a historical low, a high-interest savings account may not provide the best bang for your tax-free buck.
In 2010, I’ll continue to invest using a self-directed TFSA which allows for investments in stocks, ETFs, mutual funds, and more. Over the past year I’ve been very pleased with my self-directed Tax Free Savings Account at Questrade. To learn why I selected this account in the first place, along with some TFSA basics, see my previous post titled Self-Directed Tax Free Savings Account (TFSA).
Questrade Referral Bonus
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