Tax payable on non-qualified investments
If, in a calendar year, a trust governed by a TFSA acquires property that was a non-qualified investment or if previously acquired property becomes non-qualified, there are consequences in terms of reporting requirements and tax payable on the part of the TFSA trust as well as the holder of the TFSA.
For the purposes of TFSA taxes, if a trust governed by a TFSA holds property at any time that is, for the trust, both a prohibited investment and a non-qualified investment, the property is not considered to be at that time a non-qualified investment, but remains a prohibited investment.
Reporting requirements and tax payable by the TFSA holder (non-qualified investment)
A one-time tax is payable by the holder of a TFSA when a non-qualified investment is acquired or when a previously acquired qualified investment becomes non-qualified.
The tax is equal to 50% of the fair market value (FMV) of the property at the time it was acquired or it became non-qualified.
An individual subject to this tax is required to fill out and send a Form RC243, Tax-Free Savings Account (TFSA) Return.
Reporting requirements of a trust governed by a TFSA
The TFSA issuer must, by no later than the end of February in the year following the year in which the non-qualified property was acquired or previously acquired property became non-qualified, provide relevant information to the CRA and the holder of the TFSA. This information includes, where applicable, description of the properties, dates of acquisition or disposition, and the FMV at the relevant times. The TFSA holder needs this information to determine the amount of any tax payable or of any possible refund of tax previously paid.
If the non-qualified investment becomes a qualified investment while it is held by a trust governed by a TFSA, the trust is considered to have disposed of and immediately re-acquired the property at its FMV.
The trust is required to file a T3RET, T3 Trust Income Tax and Information Return if there is any income or gains earned in the year by the non-qualified investments.
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