Canada Tackles Tax-Free Savings Abuse

by Mike Godfrey, Tax-News.com, Washington

03 May 2010

Canada’s Minister of Finance, Jim Flaherty, announced on April 30 the launch of a consultation on draft Income Tax Act amendments relating to Tax-Free Savings Accounts.

The proposed amendments, first announced in October 2009, respond to recent concerns that have arisen regarding the use of TFSAs in tax-planning schemes.

The proposed amendments would:

• Make any income attributable to deliberate over-contributions 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 from a TFSA do not create additional tax-free contribution room;
• Effectively prohibit asset transfer transactions between TFSAs and other accounts.

“Our government is committed to enhancing the fairness of Canada’s tax rules,” said Flaherty. “Tax-Free Savings Accounts are an important vehicle for helping Canadians save. We want to ensure that the rules work appropriately for everyone.”

Interested parties have until May 31, 2010, to submit comments on the proposed amendments.

The government has said it will proceed with legislation at an early opportunity to implement the proposed amendments, taking into account any comments received.

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