CRA’s $75 Million TFSA Penalties: How Are You Using Your TFSA?

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by Enoch Omololu


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Updated for 2019!

Reports indicate that the Canada Revenue Agency (CRA) recently ordered payment to its coffers of $75 million in penalties from audited TFSA accounts. This followed their audits of tax-free savings accounts (TFSA) over the past five years.

Considering that not many people (definitely not me!) like the idea of paying additional taxes on the after-tax funds they are investing in their TFSA, it’s time to revisit how this popular savings account works. And, how to avoid penalties that may result from the ‘improper” use of the TFSA.

The TFSA in Summary

The TFSA came into existence in 2009 and is available to all Canadian residents over the age of 18 who have a valid Social Insurance Number. Capital gains or investment income earned in a TFSA are not taxed (i.e. grows tax-free), making it a very popular tool for Canadians to shield their investments from the taxman.

For someone who has been eligible to contribute to the TFSA since its inception, total contribution room up until 2019 amounts to $63,500.

For more details on the rules governing the TFSA, click here.

TFSA Penalties

Causes of TFSA Penalties

CRA levies penalties in the form of taxes when you don’t comply with the TFSA rules. Popular non-compliances that result in TFSA penalties include:

  • Excess TFSA contributions
  • Investing TFSA funds in non-qualified investments
  • TFSA containing prohibited investments
  • TFSA contributions made while deemed a non-resident of Canada

The most common reason why TFSA holders receive a notice from CRA is due to excess contributions. Excess contributions to your TFSA incur a 1% tax per month until the excess amount is removed. Unlike for registered Retirement Savings, the TFSA has no penalty-free buffer amount against errors.

Looking at the $75 million in TFSA tax to be collected by CRA, approximately 20% of the amount is expected to come from TFSA accounts that were considered to be carrying on an active business. These include individuals who are actively day-trading stocks and other securities. The remaining funds are related to penalties from failing to comply with other TFSA rules such as relating to excess contributions, prohibited investments, and so on.

Some of the factors considered by CRA in determining if a TFSA holder is conducting a business of trading stocks include:

  • The frequency of transactions: usually a higher turnover rate than would occur in a passive trading account.
  • Knowledge of securities markets
  • Length of ownership of the securities i.e. are they owned for only a short period of time
  • Time spent trading and analyzing the markets
  • Amount of margin (i.e. debt-financed) trading going on
  • Highly speculative/risky trading
  • Account holder’s day profession

Final Thoughts

Since the CRA started auditing TFSA’s in 2011, only a small percentage of accounts have run afoul of the rules each year. Of the 12.7 million TFSA holders existing at the end of December 2015, only about 20,000 of them received notices from the CRA for excess contributions.

Although the average Canadian with a TFSA is unlikely to get slapped with any significant TFSA tax penalty (or at least more likely to get a penalty waiver), it’s important that you understand the rules and play by the book if you want to keep your TFSA truly “tax-free!”

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Enoch Omololu

Enoch Omololu is a personal finance expert and a veterinarian. He has a master’s degree in Finance and Investment Management from the University of Aberdeen Business School (Scotland) and has completed several courses and certificates in finance, including the Canadian Securities Course. He also has an MSc. in Agricultural Economics from the University of Manitoba and a Doctor of Veterinary Medicine degree from the University of Ibadan. Enoch has a passion for helping others win with their personal finances and has been writing about money matters for over a decade. His writing has been featured or quoted in The Globe and Mail, Winnipeg Free Press, Wealthsimple, Financial Post, Toronto Star, Credit Canada, MSN Money, National Post, CIBC, and many other personal finance publications.

His top investment tools include Wealthsimple and Questrade. He earns cash back on purchases using KOHO, monitors his credit score for free using Borrowell, and earns interest on savings through EQ Bank.

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