Definitions for TFSA
an advantage is any, loan, benefit or debt that depends on the existence of a TFSA. An advantage also includes any benefit that is an increase in the total fair market value (FMV) of the property held in connection with the TFSA that can reasonably be considered attributable, directly or indirectly, to one of the following:
- a transaction or event (or a series of transactions or events) that would not have occurred in a normal commercial or investment context where parties deal each other at arm's length and act prudently, knowledgeably, and willingly with each other, and one of the main purposes of which is to enable the holder (or another person or partnership) to benefit from the tax-exempt status of the TFSA; or
- payment received in substitution for either:
- a payment for services rendered by the holder (or a person not at arm's length with the holder); or
- payment of a return on investment or proceeds of disposition for property held outside of the TFSA by the holder or a person not dealing at arm's length with the holder;
- a swap transaction; or
- specified non-qualified investment income that has not been distributed from the TFSA within 90 days of the holder of the TFSA receiving a notice from us requiring them to remove the amount from the TFSA.
An advantage also includes any benefit that is income (excluding dividends gross-up) or a capital gain that is reasonably attributable, directly or indirectly, to one of the following:
- deliberate over-contribution to a TFSA; or
- a prohibited investment for any TFSA of the holder.
If the advantage is extended by the issuer of a TFSA, or by a person with whom the issuer is not dealing at arm's length, the issuer, and not the holder of the TFSA, is liable to pay the tax resulting from the advantage.
An advantage does not include: TFSA distributions, administrative or investment services in connection with a TFSA, loan on arm's length terms, payments or allocations (such as bonus interest) to a TFSA by the issuer or a benefit provided under an incentive program that is offered to a broad class of persons in a normal commercial or investment context and not established mainly for tax purposes.
- Arm's length
generally refers to a relationship or a transaction between persons acting in their separate interests. An arm's length transaction is generally a transaction that reflects ordinary commercial dealings between parties in their own interests.
"Related persons" are not considered to be dealing with each other at arm’s length. For example, individuals connected by a blood relationship, marriage, common-law partnership, or adoption are related persons. A corporation and another person or two corporations may also be related persons. For more information, see Income Tax Folio S1-F5-C1, Related persons and dealing at arm's length.
"Unrelated persons" might not be dealing with each other at arm’s length at a particular time. For example, one person is under the influence or control of the other, or the persons are considered to be acting together. Each case depends upon its own facts. The following factors are useful criteria that will be considered in determining whether parties are not dealing at arm's length:
- the existence of a common mind which directs the bargaining for both parties to a transaction;
- the parties to a transaction are "acting in concert" without separate interests; " acting in concert " means, for example, a group acting with considerable interdependence in transactions involving a common purpose; or
- the existence of control of one party by the other by way of, for example, advantage, authority or influence.
For more information, see Income Tax Folio S1-F5-C1, Related persons and dealing at arm's length.
- Common-law partner
a person who is not your spouse, with whom the holder is living in a conjugal relationship, and to whom at least one of the following situations applies. He or she:
- has been living with you in a conjugal relationship and this current relationship has lasted at least 12 continuous months;
In this definition, 12 continuous months includes any period you were separated for less than 90 days because of a breakdown in the relationship.
- is the parent of the holder's child by birth or adoption; or
- has custody and control of the holder's child (or had custody and control immediately before the child turned 19 years of age) and the child is wholly dependent on that person for support.
- has been living with you in a conjugal relationship and this current relationship has lasted at least 12 continuous months;
- Deliberate over-contribution
a contribution that an individual makes under a TFSA that results in, or increases, an excess TFSA amount, unless it is reasonable to conclude that the individual neither knew nor ought to have known that the contribution could result in liability for a tax or similar consequences. Income that is reasonably attributable, directly or indirectly, to a deliberate over-contribution constitutes an advantage subject to the special tax on advantages.
- Excess TFSA amount
the total of all contributions made by the holder to all their TFSAs at or before a particular time in the calendar year, excluding a qualifying transfer or an exempt contribution,
- the holder's unused TFSA contribution room at the end of the preceding calendar year;
- the total of all withdrawals from the holder's TFSA in the preceding calendar year, other than a qualifying transfer or a specified distribution;
- for a resident of Canada at any time in the year, the TFSA dollar limit for the calendar year; for any other case, nil; and
- the total of all withdrawals made in the calendar year from all of the holder's TFSAs, other than a qualifying transfer or a specified distribution, or the portion of the withdrawal that is more than the excess TFSA amount determined at that time.
- Exempt contribution
a contribution made during the rollover period and designated as exempt by the survivor in prescribed form in connection with a payment received from the deceased holder's TFSA.
- Exempt period
period that begins when the holder dies and that ends at the end of the first calendar year that begins after the holder's death, or when the trust ceases to exist, if earlier.
- Fair market value (FMV)
usually the highest dollar value you can get for property in an open and unrestricted market between a willing buyer and a willing seller who are acting independently of each other. For information on the valuation of securities of closely-held corporations, see Information Circular IC89-3, Policy Statement on Business Equity Valuation.
the individual who originally entered into the TFSA arrangement and, after the death of the holder, includes a survivor.
a trust company, a licensed annuities provider, a person who is, or is eligible to become, a member of the Canadian Payments Association or a credit union with which an individual has a qualifying arrangement.
- Non–arm's length
refers to parties that are not dealing with each other at arm's length.
any property that is not a qualified investment for the trust. See the definition of "Qualified investment" below.
- Prohibited investment
this is property to which the TFSA holder is closely connect, it includes:
- a debt of the holder;
- a debt or share of, or an interest in, a corporation, trust or partnership in the holder has a significant interest (generally a 10% or greater interest, taking into account non-arm's length holdings); and
- a debt or share of, or any interest in, a corporation, trust or partnership with which the holder, does not deal at arm's length.
A prohibited investment does not include a mortgage loan that is insured by the Canada Mortgage and Housing Corporation or by an approved private insurer. It also does not include certain investment funds and certain widely held investment funds and certain widely held investment which reflect a low risk of self-dealing.
- Qualified donee
the Income Tax Act permits qualified donees to issue official tax receipts for donations they receive from individuals or corporations. Some examples of qualified donees are registered charities, Canadian municipalities, registered Canadian amateur athletic associations, the United Nations or one of their agencies, or a university outside Canada that accepts Canadian students.
- Qualified investment
an investment in properties, including money, guaranteed investment certificates (GICs), government and corporate bonds, mutual funds, and securities listed on a designated stock exchange. The types of investments that qualify for TFSAs are generally similar to those that qualify for registered retirement savings plans (RRSPs).
- Qualifying arrangement
an arrangement that is entered into after 2008 between an issuer and an individual (other than a trust) who is at least 18 years of age, that is:
- an arrangement in trust with an issuer that is authorized in Canada to offer to the public its services as a trustee;
- an annuity contract with an issuer that is a licensed annuities provider; or
- a deposit with an issuer that is a person who is a member, or is eligible to be a member, of the Canadian Payments Association, or a credit union that is a shareholder or member of a "central" for the purposes of the Canadian
Theresa is a 31-year-old Canadian resident. She opened a TFSA on February 6, 2009, and contributed $5,000 per year for 2009,9010,9011, and 2012. In April of 2013, she contributed $5,500. In February 2014, she contributed $3,500. Later in the year, she received a windfall of $4,100. She forgot that her contribution limit for 2014 was $5,500, and she decided to contribute the entire $4,100 to her TFSA on October 30th.
After making this contribution, Theresa had an excess TFSA amount of $2,100 in her account. This is because her total contributions as of October 30th were $7,600 ($3,500 + $4,100), which exceeded her available contribution room of $5,500.
Assuming Theresa made no further TFSA contributions and no withdrawals during the remainder of 2014, she would have to pay a tax of $63 on her excess TFSA amount. This amount was calculated as 1% per month for each of October to December × the highest excess amount in each month. In other words, $2,100 × 1% × 3 months = $63.
If, after making her $4,100 contribution on October 30, 2014, Theresa had realized her mistake and had withdrawn $2,100 on October 31, she would still have to pay the 1% tax on the excess TFSA amount of $2,100 but only for the month of October. Her tax payable would have been $21 ($2,100 × 1% × 1 month).Payments Act.
- Qualifying transfer
a direct transfer between a holder's TFSAs, or a direct transfer between a holder's TFSA and the TFSA of their current or former spouse or common-law partner if the transfer relates to payments under a decree, order, or judgment of a court, or under a written agreement relating to a division of property in settlement of rights arising from the breakdown of their relationship and they are living separate and apart at the time of the transfer.
- Qualifying portion of a withdrawal
the portion of a withdrawal from a TFSA (excluding a qualifying transfer or a specified distribution), made in the year, which was required to reduce or eliminate a previously determined excess amount.
- Rollover period
the period that begins when the TFSA holder dies and ends at the end of the calendar year that follows the year of death.
- Self-directed TFSA
a vehicle that allows you to build and manage your own investment portfolio by buying and selling various types of investments.
- Specified distribution
a distribution from a TFSA to the extent that it is, or is reasonably attributable to, an amount that is:
- an advantage;
- specified non-qualified investment income;
- income that is taxable in a TFSA trust; or
- income earned on excess contributions or non-resident contributions.
A specified distribution does not create or increase unused TFSA contribution room in the following year, nor does it reduce or eliminate an excess TFSA amount.
- Specified non-qualified investment income
Income (excluding dividends gross-up) or a capital gain that is reasonably attributable, directly or indirectly, to an amount that is taxable for any TFSA of the holder (for example, subsequent generation income earned on non-qualified investment income or on income from a business carried on by a TFSA).
A person to whom the holder is legally married.
- Successor holder
In provinces or territories that permit a TFSA beneficiary designation, a successor holder is a spouse or common-law partner of the holder at the time of death, named by the deceased as the successor holder of the TFSA, who acquires all of the rights of the holder under the arrangement including the right to revoke any beneficiary designation. This spouse or common-law partner becomes the new account holder.
an individual who is, immediately before the TFSA holder’s death, a spouse or common-law partner of the holder.
A survivor may designate a successor holder (for example, a new spouse or common-law partner of the survivor in case of remarriage of the survivor). A successor holder designation is effective only if it is recognized under applicable provincial or territorial law and the successor holder acquired all of the survivor’s rights as holder, including the right to revoke any previous beneficiary designation made by the survivor in relation to the TFSA.
- Survivor payment
a payment received by a survivor during the rollover period, as a consequence of the holder's death, directly or indirectly out of or under an arrangement that ceased to be a TFSA because of the holder's death.
- Swap transaction
his is a transfer of property between the TFSA and the holder (or a person not dealing at arm's length with the holder) occurring after June 2011, subject to certain exceptions.
The following are not considered to be "swap transactions":
- Contributions, distributions and purchase and sale transactions between TFSAs of the holder;
- Transaction related to insured mortgage loans;
- An exception is also provided to allow individuals to "swap out" a non-qualified or prohibited investment provided that the conditions for a refund of the 50% tax on such investments are met. To qualify under this exception, the individual must be entitled to a refund of tax on the disposition of the investment (generally inadvertent cases that are promptly resolved).
- Unused TFSA contribution room
the amount, either positive or negative, at the end of a particular calendar year after 2008, determined by the holder's unused TFSA contribution room at the end of the year preceding the particular year,
- the total amount of all withdrawals made under the holder's TFSA in the preceding calendar year, excluding a qualifying transfer or a specified distribution;
- the TFSA dollar limit for the particular year if, at some point in that year, the individual is at least 18 years old and a resident of Canada. In all other cases, the amount is nil.
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