The Canada Revenue Agency’s recently reinvigorated drive to weed out cross-border fiscal miscreants has taken a closer look at tax-free savings accounts (TFSA), with penalties being slapped upon those the agency has deemed to be taking advantage of these accounts.
“If you over-contribute, the penalty tax is 1% per month for each month your TFSA is in an over-contribution position. But there’s a separate, additional penalty tax of 1% per month if a non-resident contributes to their TFSA,” said Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth Management.
In a recent Bloomberg column, Golombek recounted the case of a Vancouver doctor who undertook her medical education overseas, completing her professional requirements in the United Kingdom from 2006 to 2012.
“While in the U.K. as a student, and, on the advice her Canadian investment adviser, she made contributions to her TFSA in 2009 ($5,000), 2010 ($1,500) and 2012 ($494),” Golombek said.“She completed her studies in June 2011 and then commenced two years of residency training in family medicine. In November 2012, she registered with the Canadian Residency Matching Service as a fully licensed U.K. doctor, to obtain a residency position in Canada. Finally, in April 2016, she obtained a residency position at a Vancouver hospital and in June 2016, returned back to Canada.”
In 2018, the taxpayer received a message from the CRA indicating that she was assessed with $17,006 in TFSA penalty taxes and arrears interest, on the grounds that she was a non-resident of Canada from 2009 to 2016.
Fortunately for her, residency “is determined on a case-by-case basis,” with the most important factor being whether or not the individual maintained residential ties with Canada.
“The taxpayer argued that during the period that she was in the UK, she maintained a room in her parents’ home and always regarded the space in her parents’ home as her permanent home. She kept many of her possessions there until August 2016, when she moved to Vancouver,” Golombek said.
On top of this, the taxpayer maintained a line of credit from a Canadian bank, retained her bank accounts and credit cards, and renewed her Canadian passport, as well as securing Canadian citizenship for her U.K.-born daughters.
Taken together, these elements constituted the taxpayer’s strong primary and secondary ties to Canada despite living abroad for several years,Golombek said. These facts compelled the CRA to decide that the taxpayer became a non-resident only on July 1, 2011 and resumed Canadian residence on June 6, 2016 upon beginning her medical residency in Canada.
“The result, therefore, was that only the 2012 TFSA contribution of $494 was subject to non-resident penalty tax and interest, which totalled approximately $300, a far cry from the initial TFSA reassessments totalling over $17,000,” Golombek said.