Posted: 21 Oct 2009 03:30 AM PDT
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 Tax refunds are not offered on deposits, but amounts can be withdrawn from the TFSA without any taxation or conflict with seniors benefits.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:
Over ContributionsOver 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 InvestmentsWhat is considered a non-qualified investment?
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 TransferBasically, 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?
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