2017 TFSA contribution limit | Page 2 | Tax Free Savings Accounts | Discussion forum

Bill said
Norman1, you are painting a very nice picture of family and inter-generational financial relationships, and referring to all these "grateful" young folks. True, but things often happen or change, e.g. new spouses or partners enter the picture, or another sibling being upset they're not getting a similar advantage, and so on. Not to be cynical, but tread very, very carefully in this stuff would be my advice.

I agree. Not a strategy that every family would be able to implement.

To deal with potential issues with new spouse or partners, I would make the mortgage have a five-year term. Entire outstanding balance will come due at the end of the term, just like a mortgage from a bank. Everyone can then decide whether or not to renew the arrangement for another five years.

And on "granny mortgage", wouldn't CRA take the view the legal agreement is a sham (who gets interest-free mortgages?), the annual "gift" (which happens to approximate what a 5-year GIC pays) is actually interest income of the grandparents, in your example? (Again, how CRA would ever find out is another topic.)  

CRA won't have a problem with the interest-free mortgage. They are quite common between related people.

The gifts could be an issue. There could be a question of whether the payments/gifts are gifts or interest payments on the mortgage.

Grandparents are thinking of going on an Alaskan cruise. The grateful child finds out and gives the grandparents the Alaskan cruise for Christmas that year. Value of the cruise is about the year's interest on a five-year GIC.

For tax purposes, would that cruise be a gift or interest payment?

I agree that interest-free loans between non-arm's length parties are common, people can do what they want, and the Income Tax Act has various provisions to deal with the income tax implications, if any. There is even a specified interest rate that it provides for to calculate interest, for income tax purposes, for loans between non-arm's length persons. There is also a general anti-avoidance provision which attacks transactions whose driving impetus is the tax advantage.

Whether or not CRA chooses to enforce the rules or ever finds out about these transactions is a completely different issue, CRA usually takes it easy on stuff unless they stumble upon it in a routine audit or until it becomes widespread and threatens to become a problem for the national Treasury.

To me it's up to us to test the limits of what can be done (sort of like bugging our favourite bank for "promotional" interest that others don't get!), it's up to CRA and the courts to decide when the line's been crossed, that's how these things get straightened out for everybody. Norman1, in your example I think it's pretty clear (nudge, wink), including to CRA, that we're dealing with interest income to the grandparents.

Norman1, you refer to the TFSA annual limit indexing calculation. There was a Financial Post article recently indicating the indexed amount calculation at the end of 2016 is $5637 hence the limit of $5500 for 2017. The indexed amount has to get to $5750 for the next bump so it would take 2017 CPI increase of just over 2% to make the TFSA limit $6000 for 2018. Depending on inflation, 2019 looks more likely to be the first year the limit goes to $6000.

Top It Up, I agree that it's good that most Canadians are law-abiding folks and also that Canada may be in "trouble", but I disagree that seeking to operate at the legal limit of the tax law (which is only determined by testing it, that's what the tax courts are for, to establish what is "offside" and what is ok) is equivalent to operating "underground", i.e. completely outside the taxing framework. And the "spirit of the law" is subjective and subject to debate (last thing I want is CRA officials deciding - on a case-by-case basis and how they feel that day - what the "spirit" of the law might be in each case), that's why the tax courts look first to the actual wording of the relevant provisions. Laws can be and are amended if the legislators discover their intention is not met by the current wording.

Loonie said
What ever happened to "the spirit of the law"?

The purpose of a TFSA is for an individual to build their own nest egg tax-free, with an annual ceiling. It's not to give their parents a workaround so that they can double, triple, quadruple, etc., their TFSA tax avoidance privileges.
I wouldn't want to have to defend workarounds in court. … 

I don't think multiplying TFSA limits is contrary to the spirit of the law.

One is allowed to contribute borrowed money to one's TFSA.

Doubling TFSA limit with spouse is specifically allowed by Income Tax Act 74.5(12)(c), which suspends spousal income attribution while funds given to spouse are in his/her TFSA. Otherwise, the TFSA trust would be a trust for the spouse and be subject to spousal attribution.

If sharing spouse's TFSA limit had occurred to the government, then it is likely sharing of the adult children's TFSA limit would have occurred to them as well. No explicit suspension of income attribution for child TFSA's was needed as there's no attribution of income on funds given to an adult child or the trust of an adult child. No new attribution rules were put in place for children's TFSA trusts to prohibit this.

If someone has unused TFSA contribution room, I don't think there is any issue lending money for him/her to invest in their TFSA.

The only issue is whether or not any gains that make it back to the lender are taxable in the lender's hands.

Norman1 said

Loonie said
What ever happened to "the spirit of the law"?

The purpose of a TFSA is for an individual to build their own nest egg tax-free, with an annual ceiling. It's not to give their parents a workaround so that they can double, triple, quadruple, etc., their TFSA tax avoidance privileges.
I wouldn't want to have to defend workarounds in court. … 

I don't think multiplying TFSA limits is contrary to the spirit of the law.

One is allowed to contribute borrowed money to one's TFSA.

Doubling TFSA limit with spouse is specifically allowed by Income Tax Act 74.5(12)(c), which suspends spousal income attribution while funds given to spouse are in his/her TFSA. Otherwise, the TFSA trust would be a trust for the spouse and be subject to spousal attribution.

If sharing spouse's TFSA limit had occurred to the government, then it is likely sharing of the adult children's TFSA limit would have occurred to them as well. No explicit suspension of income attribution for child TFSA's was needed as there's no attribution of income on funds given to an adult child or the trust of an adult child. No new attribution rules were put in place for children's TFSA trusts to prohibit this.

If someone has unused TFSA contribution room, I don't think there is any issue lending money for him/her to invest in their TFSA.

The only issue is whether or not any gains that make it back to the lender are taxable in the lender's hands.  

Norman, I think you are conflating the legal details with the spirit of the law - unless, of course, the Conservative government really intended for people to build even larger nest eggs simply because they had more money in the first place than the other guy. That would be an advantage of wealth that was not talked about, even by the keenest of journalists as far as I recall, when the TFSA was brought in.

In terms of legal detail, yes, there would be a question of attribution. The special circumstances for spouse do make sense to me, in the same spirit as RSPs being transferred from one spouse to another upon death - but even they do not arrive in the hands of the children without being taxed. The fact that an exception was made in the law for TFSAs for spouses does not suggest to me that the same was intended for children. If that were intended, then that's what the law would have said.

Over the years, many legal loopholes have been created, inadvertently or not, which were contrary to the spirit of the law or of fairness, and they have later been closed. I think this one should also be closed, to the extent that it exists. Maybe I should write to my MP about that...

I sure wouldn't want to be taxed on my Christmas chocolates from Oaken!

I added the concept of fairness when it dawned on me that the previous Conservative government might have knowingly allowed this loophole to exist so as to allow those who have money to get even more of it. However, I don't know if that was clear to them at the time or not.

What I do feel confident about is that the majority of Canadians would not think this was fair. I think the average person would assume the TFSA is meant for individuals to get some tax free income, but only at the specified allowed rate of deposits, and would not think it was fair for anyone to try to multiply that just because they happen to have more money in the first place.

It is, at best, a sloppy piece of legislation. If people are supposed to be able to multiply their deposits, then why not just have bigger limits so that all can benefit and not have to rely upon however many children or impecunious relatives they happen to have (could include elderly parents for that matter, who could then will the account back to oneself tax free)? Makes no sense.

What is needed is more clarity in the legislation, although I can see that it would be difficult to enforce. Nonetheless, it wouldn't hurt to write it in.

There can certainly be debates about the meaning of "fairness", but that doesn't mean that some consensus or at least majority viewpoint can't be reached or expressed. Indeed, legislation ought to express this. It's a pity that the concepts under discussion here have never been raised for the public to consider, at least as far as I recall, either before or after legislation.

I can't agree that the difficulty of reaching such agreement means that ethical discourse on the subject should be abandonned or simply considered as "he said, she said" and therefore not subject to resolution. As a society, it's our job to wrestle such questions through, uncommon though that may be at present in the era of the quick byte, tweet, shouting matches among TV panelists, low regard for standard of truth, etc. I would argue, in fact, that our survival as a society, and, increasingly, as a global community, in fact depends on it.

This particular question aside, we need to work at understanding where we are going and where we want to go, ethically, as a society. It is only in such thoughtful discussions that we will get past considering only ourselves and how we can accumulate more individually. We won't get very far without some common moral understanding, and never have. I'm no philosopher or lawyer, but it seems to me that pretty well all our laws are evidence of some sort of moral stance, reflecting how we think things "should" be. Periodically, we re-think them and change the rules. Most of this does not happen in the public arena, however, which is too bad. I'm in favour of more civic engagement.

As for the particular issue, I would agree that the present gov't has not likely heard many, if any, complaints on this issue, has not suggested it will change anything, and may very well leave it alone. I doubt that very many people have even thought about it much - except for those who see an advantage for themselves in the current arrangement. They did, however, get rid of the "corporate class" mutual funds loophole in the last budget, and I don't recall that that was announced in advance or discussed either.

I suspect it would be quite unpopular to attempt to tax profits on TFSA of a deceased person before passing on to beneficiary, in part because, unlike RSPs/RIFs, which have the purpose of funding retirement and postponing taxation, TFSAs have no real purpose other than tax sheltering, so you would defeat the purpose if you taxed them. The legislation does distinguish here between spousal inheritance, viewing it as matrimonial property much like an RSP, and transfer to another beneficiary who gets the proceeds but not the future sheltering. But I don't think the majority would go for idea of deliberately hiding one's money in the contribution room of someone else, such as a child. The majority have never been keen on things from which only those with more money can benefit. You are entitled to think otherwise and to express your support of the current arrangement. The issues need public debate but, right now, they are as hidden as the funds in question.

To the extent that it may be true that most people support the view that most benefits them, I can't imagine how the current arrangement would garner majority support. Most people simply don't have the money to allow their children to hold an extra $5500/yr each until such time as they're on their feet financially and able to catch up these contributions and get up to speed on their own. Could take decades, and mom and dad could be long gone!
So, if junior pays it back to mom and dad, then it's a loan, whether declared as such or not, and attribution rules ought to apply, and mom and dad ought to owe tax on it, whether CRA notices it or not.
If junior never pays it back, either because he or she is a scoundrel or because mom and dad die before he or she ever gets caught up on contributions, then it's a form of wealth transfer which avoids probate fees. This is not the only such manoeuvre out there (another being, for example, putting a second home into a child's name to avoid capital gains), so one could say that it's sanctioned to some extent. But that does not mean the majority would support it if they ever thought about it. People who don't have a lot to spare, don't have second or third homes, and don't have the money to merit hiring advisors to suggest such manoevres, will not likely see it in their interests to facilitate greater wealth transfer by those who have a lot more money than they do. Statistically, they are in the majority.

Statistics presented here http://www.freedomthirtyfivebl.....-net-worth show average liquid assets for Cdn families (not indiviuals) at $252,000. As this is the average and not the median, it is likely that the median is lower because the upside ceiling is much greater than the bottom, meaning that more people have less than have more. Those who only have a few hundred thousand or less are more likely to be thinking of their emergency funds, whether they will have enough in retirement or to buy new car/furnace/RV etc, and whether they can take vacations and fulfil their dreams rather than giving or loaning money to the TFSAs of their children.

For people who have somewhere around a million or more in liquid assets, yes, they might very well be looking for more ways to avoid paying taxes on investment income. But they are clearly the minority.

And, for the record, I haven't and won't contribute to the TFSAs of anyone other than my spouse, directly or indirectly. It's my choice.