A reader emailed me an article regarding proposed TFSA changes made by our Finance Minister, Jim Flaherty.  Before you get too concerned, there aren’t any major changes to benefits, but proposed changes to close any loop holes.

Before I get too far ahead of myself, lets get back to basics.  A tax free savings account (TFSA) is an account where investments can compound tax free.  Tax refunds are not offered on deposits, but amounts can be withdrawn from the TFSA without any taxation or conflict with seniors benefits.  The deposit limit increases by $5,000 per year (over age 18).  For more details, check out my original post about TFSAs.

With the basics out of the way, as mentioned, the Finance Minister has proposed a few changes to the TFSA:

  • Make any income attributable to deliberate overcontributions and prohibited investments subject to existing anti-avoidance rules in the Income Tax Act.
  • Make any income attributable to non-qualified investments taxable at regular income tax rates.
  • Ensure that withdrawals of deliberate overcontributions, prohibited investments, non-qualified investments or amounts attributable to swap transactions, or of related investment income, from a TFSA do not create additional TFSA contribution room.
  • Effectively prohibit asset transfer transactions between TFSAs and other accounts.

Over Contributions

Over contributions in the TFSA are currently charged an interest of 1% per month. Even though this fee is hefty, some are intentionally over contributing in an attempt to surpass the penalty in profits. For example, if someone bet the index in March 2008 by over contributing to a TFSA, the investment gain would easily beat any penalties charged.

What do the proposed changes mean?  Simply that if the investor intentionally over contributes, invests and makes a profit, the gains will be completely taxed away.  Basically the changes will eliminate the incentive to over contribute.

Non Qualified Investments

What is considered a non-qualified investment?

  • Shares of the capital stock of a corporation in which the holder has a significant (10% or greater) interest
  • Investments in entities with which the holder does not deal at arm’s length
  • Land
  • General partnership units

What are the new penalties for non-qualified investments?  According to the Globe Investor

Any gains on prohibited investments, such as shares of a company in which you own a significant interest, will be taxed at 100 per cent while any secondary income related to non-qualified investments, such as land or general partnership units, will be taxed at regular rates.

Asset Transfer

Basically, this new rule prohibits the transfer from registered and non-registered accounts (non-cash) to a TFSA.

The proposed amendments would effectively prohibit asset transfer transactions between registered or non-registered accounts and TFSAs. The prohibition would apply to transfers effected between accounts of the same taxpayer or that of the taxpayer and an individual with whom the taxpayer does not deal at arm’s length.

Generally speaking, the proposed changes will not affect the everyday investor, but perhaps those who like to push the rules to the limit.  What are your thoughts on the new rules?


  1. Canadian CC on October 21, 2009 at 9:49 am

    I would say that the major change is in regards to the taxation of over contribution. I know a lot of people that were deliberately over contributing during this bull market and made great returns.

    I have traded market index ETFs since January, you probably made 30% return while the penalty is only 10%. Still a nice profit of 20% tax free ;-).

    However, I think the Government did those modifications not only to perceive more taxes but to protect young and inexperienced investors who thought of doing such strategy.

    Historically, the market makes about 9% and you must make more than 12% over a year to make sure you are actually making money. Unless an individual contributs 50K in their TFSA and tries to make a quick buck, making 10-20% on $5,000 is not much considering the risk.

  2. Beth on October 21, 2009 at 9:56 am

    Great post! I was wondering if you could elaborate on the asset transfer a little? I’m not sure I understand. Does the change mean you couldn’t transfer money between a savings account and a TFSA? I’ve been thinking of moving money from one account to another to shelter it from taxes (thereby maxing out my room for 2008). Is that what the new change is trying to target?

  3. Sampson on October 21, 2009 at 10:46 am

    Man, I squeezed in an asset transfer for the first year, but this was from a non-registered account (and at a slight capital loss, so no advantage to me).

    I hadn’t even considered transferring from an RRSP, now that would have been smart.

  4. Four Pillars on October 21, 2009 at 10:52 am

    I was going to post on the over-contribution rule on Friday but maybe I won’t bother now. :)

    I can’t understand why anyone would over contribute under the old rules – how do they know they will be “making a killing” at any given time? If I had a surefire way to get 20%+ I would be very busy getting that great return and wouldn’t be worrying about taxes very much.

    In my mind the fact that you can’t write off any losses offsets the tax free gain. And the 1% penalty makes it a losing proposition.

    Canadian CC – You need to make a lot more than 12% if the money was over-contributed (at 1% penalty per month). Don’t forget the normal cap gains tax is only applied on half of the gain. You would need to make at least a 48% return (approx) to make it worthwhile (assuming a 50% marginal tax rate – if your tax rate is lower then the required return would be even higher).

    ie if I have $5000 in an open account and realize a 48% gain – my taxes will be a maximum of $5000 * 0.48 / 2 * 0.5 (tax rate) = $600.
    If that $5000 is over contributed to a TFSA then under the old rules the penalty would be 12% – it’s actually 1% per month which isn’t quite the same thing but 12%/year is easier to calculate. In that case the penalty is $600 which is equal to the taxes in the open account. If the rate of return is higher than 48% the taxes in the open account would increase but the penalty in the TFSA account would remain constant.

    I’m also curious about the ineligible investments – my theory on that is maybe people were putting in shares of a private corp but undervalued. Ie they contributed shares worth $5k at the beginning of the year but later on revalued the shares at their true worth (ie $100k) which of course is cheating.

  5. Cliff on October 21, 2009 at 11:27 am

    Here is my question. I hold a stock in my CDN trading account. I believe, or hope this stock going to go up in value. I decide to transfer this stock to my TFSA account, understanding I recognize the capital gain with the move.

    Will this now be not allowed?

  6. Cam Birch on October 21, 2009 at 12:41 pm

    Most of the proposed changes make sense. I was actually giving thought to doing some over contributions to build money tax free. It wasn’t really a smart idea to begin with but sometimes the thought of cheating without cheating is fun. I didn’t realize that over contributions could cause an increase in available contribution room, guess they really didn’t think that one through.

    I am concerned about the asset transfer. Sometimes you can have assets in a trading account that could be hard to acquire, or you just don’t want to sell to have to repurchase. I think that transferring assets in kind really does make sense in some situations, even if it means you need to pay the capital gains or whatnot. The biggest issue with a sell/buy is it could trigger some of the governments crazy capital gains avoidance laws and get you all taxed to hell.

  7. Charles in Vancouver on October 21, 2009 at 3:34 pm

    I am also concerned about the asset transfer ban… I have a small portfolio in ETFs and for the next many years the TFSA will make more sense for me than the RRSP. My plan was simply to shift that portfolio into TFSA, one chunk at a time, every year when I get new room. Certainly this doesn’t constitute gaming the system, does it? Are they telling me that now I have to incur a sell and buy commission ($19 each way at my brokerage) in order to effect the same result??

    This strikes me as overly punitive to small investors. I have jumped through enough hoops already to get myself a low-fee balanced portfolio. Why should I have to pay more for my investments because a few ingenious gamers broke the system?

  8. fillalph on October 21, 2009 at 5:54 pm

    Just made the biggest make … I didn’t read.

    I had some shares of BMO in a cash account and transferred them to my TFSA. The book value is 8018.00 (I am an idiot – anyhow) and the current market value is approximately 11K

    Today I saw your article and am trying to determine what to do. I called Canada Revenue Agency and to get under the $5K limit I have transfer out $3018 according to them.

    Do I just figure out how many shares will give me that much market value today and transfer them back to my cash account? $3018/$51.99/share = 58.04 shares.

    So I should transfer say 59 (round up) to be safe?


  9. Kate on October 21, 2009 at 8:34 pm

    Not being able to transfer assets is a bummer. When these changes are supposed to happen?

  10. Chet on October 21, 2009 at 10:37 pm

    Kate: announced 10/16/09…

    “the proposed amendments are to apply to transactions that occur after today. “

  11. Jerry on October 22, 2009 at 6:31 am

    I think these changes are reasonable. Although the overcontribution idea does not seem like “investing” but more like gambling to me, if they can increase their limits unfairly this way, I think it is cheating the intended proposed system.

    I dislike the asset transfer ban as well for reasons mentioned above.

  12. YYC27 on October 22, 2009 at 6:40 pm

    I don’t think they’re banning transfers in kind. They’re banning swap transactions — I put in $1,000 worth of shares, and take out $1,000 cash. From the press release:

    “Asset transfer transactions” (sometimes known as “swap transactions”), in this context, refer to transfers of property (other than cash) for cash or other property between accounts (for example, a Registered Retirement Savings Plan (RRSP) and another registered account) that are generally not treated as a withdrawal and re-contribution, but instead as a straightforward purchase and sale. Subject to the application of existing anti-avoidance rules in the Income Tax Act, these transfers, when performed on a frequent basis with a view to exploiting small changes in asset value, could potentially be used to shift value from, for example, an RRSP to a TFSA without paying tax, in the absence of any real intention to dispose of the asset.

  13. Chet on October 22, 2009 at 6:47 pm
  14. cannon_fodder on October 22, 2009 at 8:26 pm

    I also think these changes are absolutely reasonable. And, for me, they are a non issue.

    What I’d like to see is an increase in the contribution limit by $100 per year (that’s about 2%) rather than wait until inflation has risen over the years to bring about a $500 uptick in the contribution limit.

  15. Briefcases on October 23, 2009 at 6:31 pm

    It sounds like these rules are not a problem. They seem to mostly affect people who were somehow taking advantage of their TFSA. It shows that the government did not fully think things through to establish proper rules from the beginning.

  16. Sam Li on October 24, 2009 at 9:11 pm

    That’s kind of ironic. Finally government did something good for a financially average Canadian, but guess what, it didn’t survive for a long.

  17. James on October 30, 2009 at 1:15 am

    can I sell my RRSP stocks at a loss to the market and then buy the same RRSP’s in my TFSA from the market?

  18. James on October 30, 2009 at 1:18 am


    can I sell my RRSP stocks at a loss to the market and then buy the same stocks in my TFSA from the market?

  19. FrugalTrader on October 30, 2009 at 6:12 pm

    Hey James, I don’t see why not as you cannot claim a capital loss from your RRSP.

  20. fillalph on October 30, 2009 at 7:31 pm

    I am still learning, but don’t you have to wait 30 days or it would be a superficial lost?

  21. FrugalTrader on October 30, 2009 at 7:37 pm

    I may be wrong, but my understanding is that superficial loss rules were created to eliminate people selling stock for a loss to claim the capital loss then rebuying it shortly afterward. If a stock is held within an RRSP, there is no capital loss claimed, so it shouldn’t matter. Perhaps an accountant would be able to clarify?

  22. Chet on October 30, 2009 at 8:14 pm

    When an investment is held within a registered account like an RRSP, it changes its character. Anything that happens within an RRSP stays within an RRSP until it is is withdrawn and then is treated like regular income without any preferential tax treatment and is added to all other incomes in the year of withdrawal. You can sell whatever you want within an RRSP without any tax consequences if you leave it there. However if you want to buy the same positions that you sold within the RRSP and then withdraw the cash from your RRSP, you would pay tax on the withdrawn amount. You can always buy them back within your TFSA as well as long as you do not exceed your maximum contribution amount within the TFSA for the current year.

    Seems to me if you think that the positions you are selling should appreciate over time and still think that they are a good investment, you should consider buying them within your TFSA and not sell within your RRSP letting them appreciate. Assuming you have the capital.


  23. Ed Rempel on October 31, 2009 at 2:02 pm

    Hi FT, James & fillalph,

    You are all on the right track. There is no problem with selling in a TFSA and buying the same investment in an RRSP, or the other way around.

    The superficial loss rules kick in if you sell a non-registered investment at a loss and then buy the same investment within 30 days – either you or your spouse, even in an RRSP or TFSA. Then the capital loss on the non-registered investment is not allowed.

    If you are only buying and selling in RRSPs or TFSA, and not claiming non-registered losses, then there is no problem.


  24. Rick on November 13, 2009 at 2:08 am

    I have two TFSAs. One is with a financial institution and has some GIC’s> Some of the GICs which will mature in Jan/09. I want to take the cash from the maturing GICs and put it into the other TFSA which is with a discount broker. Does anyone see a problem?

    Or will I have to wait until 2011 to reinvest the monies into the Discount Broker TFSA?

  25. Craig on December 4, 2009 at 2:35 am

    I am interested in purchasing a real-estate investment property with my tfsa. The rules state land investments are not allowed,but what about co-operative condominiums. The building is owned by a trust and the owner only owns a share providing exclusive use of the property. Is that a way of gaming that rule legally?

    TFSA – $46,000 ish. I love 2009! My strategy was pretty high risk options investments but being under 30 I had the timeline to recoup losses.

  26. REIT Art on March 29, 2010 at 2:56 pm

    If you want to buy real estate in a TFSA buy REITs

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