Tax payable on prohibited investments

If, in a calendar year, a trust governed by a TFSA acquires property that is a prohibited investment or if previously acquired property becomes prohibited, there are consequences for the TFSA holder in terms of reporting requirements and tax payable.

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 (prohibited investment)

A one-time tax is payable by the holder of a TFSA when a prohibited investment is acquired or when a previously-acquired property becomes a prohibited investment.

If the prohibited investment ceases to be a prohibited investment while it is held by the trust, the trust is considered to have disposed of and immediately re-acquired the property at its fair market value (FMV).

The tax is equal to 50% of the FMV of the property at the time it was acquired or it became prohibited.

For transactions after October 16, 2009, the income or capital gain that is reasonably attributable to a prohibited investment is deemed to be a benefit under the definition of “advantage” and is subject to tax under the advantage rules. For more information, see Tax payable on an advantage.

Note

This tax may be refundable. See Refund of taxes paid.

For information on the filing deadline for this return, see TFSA excess amount correspondence explained.

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