CRA Expands Audits of Tax-Free Savings Accounts (TFSAs)

We have reported previously on the audit initiatives of the Canada Revenue Agency (CRA) with respect to Tax-Free Savings Accounts (TFSAs) (http://www.thor.ca/tax-alerts/punitive-tfsa-audits/ and http://thor.ca/blog/2012/11/cra-begins-issuing-tax-free-savings-account-tfsa-reassessments/). Recent discussions and correspondence with the CRA suggest a significant expansion of those audit activities.

The TFSA program began on January 1, 2009 with individuals 18 years and older entitled to contribute $5,000 to a TFSA. Contributions to a TFSA are not tax-deductible, but investment returns within the TFSA are (usually) tax-free and both contributions and investment returns may be withdrawn from the TFSA without tax consequences.

The contribution limit remained at $5,000 per year until 2013, when the annual limit increased to $5,500. The aggregate contribution limit up to 2013 is, therefore, $25,500 per person.

In late 2011, the CRA began auditing TFSA holders for the 2009 and 2010 calendar years. Some had realized outsized gains as they capitalized on the buoyant commodities run through the course of 2009 and, to a lesser extent, 2010, using $5,000 or $10,000 of risk capital within their TFSAs. The CRA responded with audits and numerous reassessments and proposed reassessments of individuals with large TFSA balances. The reassessments to date have been based on alleged contraventions of the “advantage” rules, swaps and related benefits, and valuation issues giving rise to potential overcontributions. We have been retained to challenge many of those assessments.

Recently, we have become aware that the CRA is expanding its TFSA audit period to at least the 2011, and perhaps the 2012, calendar year. With the market being generally less buoyant in the 2011-2012 compared to 2009-2010, there will not be as much low-hanging fruit for the CRA to pick in its search for outsized gains and possible contraventions (imagined or otherwise) of the TFSA rules. However, as cumulative contribution limits have grown to $20,000 per individual by the end of 2012, some investors will undoubtedly have realized significant gains in their TFSAs. Those who have accumulated large balances in their TFSA, either by luck or by skill, will likely be high on the CRA’s audit radar screen.