The Canada Revenue Agency (CRA) has begun issuing assessments to holders of Tax-Free Savings Accounts (TFSAs). So far, we have seen primarily assessments issued under the authority of section 207.05 of Part XI.01 of the Income Tax Act (Canada) in respect of advantages received by a TFSA. This is an obscure provision, even for tax practitioners. The assessments typically assess as tax the full amount of the TFSA’s value as of the end of 2010, plus penalties, plus interest. We have previously noted the punitive nature of these assessments.
Ordinarily, the CRA has three years from the date when a tax return was first assessed to disagree with any of the reporting positions taken by a taxpayer, and to issue a reassessment. However, the CRA faces no such three-year limitation in reassessing the holder of a TFSA, because typically no Part XI.01 return (Form RC243) was filed in the first place. It should be noted that a return was required to be filed only if there was tax to pay under Part XI.01 – and, of course, for all who are now being assessed, they were unaware that the CRA was taking issue with their TFSAs such that tax could become payable. Thus, as a result of no returns yet having been filed, the CRA is now issuing “assessments” and not “reassessments” of the TFSA holder.
One incidental effect of not filing a Part XI.01 return is that the CRA is in many cases also assessing a late-filing penalty (of up to 17% of the unpaid tax) for failing to file the TFSA return. In most cases, after factoring in the interest and late-filing penalty, the assessment winds up being 125% or more of the closing statement value at the end of 2010.
The tax is payable by the TFSA owner, not by the TFSA itself. Therefore, the owner is not insulated from any decline in the market value of the TFSA. As it presently stands, the CRA takes everything on the way up, and stands back to let the TFSA owner take the losses – with no tax relief on the way down. This can result in the owner owing far more in assessed tax, interest and penalties than the current value of the TFSA.
We are vigorously disputing these assessments because, in our view, the CRA has far overstepped the language of the Income Tax Act.