While most of us use our TFSAs as general purpose, tax-free savings or investment vehicles, the Canada Revenue Agency has been cracking down on perceived misuse of the accounts by assessing some taxpayers with an overcontribution tax, and others for falling afoul of the “advantage rules” for registered plans. Two separate tax cases, out last month, dealt with TFSA penalty taxes.
Non-resident TFSA contributions
The first case involved TFSA overcontributions. If you overcontribute, the penalty tax is one per cent per month for each month your TFSA is in an overcontribution position. But there’s a separate, additional penalty tax of one per cent per month if a non-resident contributes to their TFSA, which is what happened in the first case.
In August 2006, the taxpayer left Canada to begin her medical studies in the U.K. While in the U.K. as a student, and, on the advice her Canadian investment adviser, she made contributions to her TFSA in 2009 ($5,000), 2010 ($1,500) and 2012 ($494). She completed her studies in June 2011 and then commenced two years of residency training in family medicine. In November 2012, she registered with the Canadian Residency Matching Service as a fully licensed U.K. doctor, to obtain a residency position in Canada. Finally, in April 2016, she obtained a residency position at a Vancouver hospital and in June 2016, returned back to Canada.
Much to her surprise, in 2018 the taxpayer received Notices of Reassessment from the CRA for 2009 to 2016, assessing her a total of $17,006 of TFSA penalty tax and arrears interest, asserting that she was a non-resident of Canada when she contributed to her TFSA. Indeed, to be able to contribute to a TFSA (and to accumulate the annual TFSA contribution room), you must be a resident of Canada for tax purposes.
An individual’s residency status is determined on a case-by-case basis, taking into account many factors. The most important consideration is whether or not the individual maintains residential ties with Canada. Significant residential ties to Canada include: a home in Canada, a spouse or common-law partner in Canada and dependants in Canada. Secondary residential ties include: personal property, such as a car or furniture, in Canada; social ties in Canada, such as memberships in Canadian recreational or religious organizations; economic ties in Canada, such as Canadian bank accounts or credit cards; a Canadian driver’s license, a Canadian passport, and provincial health insurance.
The taxpayer argued that during the period that she was in the UK, she maintained a room in her parents’ home and always regarded the space in her parents’ home as her permanent home. She kept many of her possessions there until August 2016, when she moved to Vancouver.
While studying in the U.K., she kept strong secondary ties to Canada, including funding her medical school fees and expenses with annual loans from a student line of credit from a Canadian bank, as well as through various federal and Ontario student loan programs. She retained and renewed her Canadian passport, and obtained Canadian citizenship for her two daughters who were born abroad. She kept and renewed her Ontario Driver’s licence, her Canadian bank accounts and credit cards, and maintained her Ontario Health Insurance as an overseas student. She continued to be listed as an occasional driver on her parents’ vehicle insurance and returned to Canada nearly every year from 2006 to 2012 to maintain her ties to Canada. Lastly, she filed Canadian income-tax returns as a resident of Canada that were always assessed as filed.
In other words, although the taxpayer was physically absent from Canada during her years abroad, she argued that she maintained significant ties to Canada during her period of her absence and “intended to return to Canada upon completion of her medical studies and has, in fact, returned to Canada.”
In a consent to judgment issued last month, the CRA conceded that the taxpayer was a resident of Canada until June 30, 2011. This was a negotiated date that was selected by the CRA, as it was the date the taxpayer had completed her medical degree and could have returned to Canada, in theory, to complete her residency/licensing training. The taxpayer became a non-resident on July 1, 2011 and resumed Canadian residence on June 6, 2016, when she began her medical residency position in Canada.
The result, therefore, was that only the 2012 TFSA contribution of $494 was subject to non-resident penalty tax and interest, which totalled approximately $300, a far cry from the initial TFSA reassessments totaling over $17,000.
Advantage rules 100 per cent penalty tax
The second recent case involving TFSA penalty tax was at the Federal Court of Appeal and concerned the “advantage rules,” which are a series of anti-avoidance rules in the Income Tax Act designed to prevent abuse and manipulation of all registered plans, including TFSAs. If you find yourself offside these rules, you could face a 100 per cent penalty tax on the fair market value of any “advantage” that you receive that is related to a registered plan.
The taxpayer was appealing a 2018 decision of the Tax Court in which he was reassessed nearly $125,000 in penalty tax applicable to the advantage the CRA says he received in connection with the transfer of private company shares to his TFSA.
The taxpayer went to court to challenge the constitutionality of the 100 per cent advantage tax. He argued that since the CRA has the discretion to reduce the 100 per cent advantage tax to zero, Parliament “improperly delegated the rate-setting element of (tax) … to the (CRA)” in contravention of the Constitution Act.”
Not surprisingly, the Tax Court, and now, the appellate court, dismissed the taxpayer’s appeal, concluding that Parliament, via the explicit wording found in the Income Tax Act, “has prescribed the liability for the tax, the persons on whom it is imposed, the conditions on which a person becomes liable for it, and criteria by which the amount of tax can be determined. (It) delegates nothing to the (CRA).”
The Court did find that there was a wider issue to be considered as to whether the CRA’s power granted under the Income Tax Act to reduce or cancel the tax constitutes “an invalid delegation of taxation power to the (CRA).” But, due to a “lack (of) adequate submissions and fully developed reasons from the Tax Court,” the appellate court refused to weigh in, concluding: “We should leave the broader issue for another day.”