The federal Ministry of Finance has proposed amendments to the Income Tax Act that will tighten the rules for tax-free savings accounts (TFSAs).
Many of the amendments are aimed at preventing intentional tax avoidance. For example, one proposal would make any income attributable to deliberate over-contributions or prohibited investments to an investor's TFSA subject to existing anti-avoidance rules in the Income Tax Act.
Another proposal would make any gains from non-qualified investments taxable at regular income tax rates.
Based on the existing rules for TFSAs, over-contributions above the $5,000 a year limit are subject to a 1% tax per month on the highest amount of excess contributions in a month.
The tax level was seen as a sufficient deterrent to neutralize the tax benefit of over-contributions.
However, the government became aware of certain situations where people were attempting to generate a rate of return on deliberate over-contributions over a short period of time that would outweigh the cost of the 1% tax. Under the new amendments, any income earned from over-contributions would become 100% taxable.
More information about these proposed changes is available on the Ministry of Finance website, www.fin.gc.ca