Tax free savings account holders who are currently being tax audited by the Canada Revenue Agency are being banned from making withdrawals as dealers are trying to limit their exposure and avoid being responsible for the tax bill.

The Investment Industry Association of Canada reported an incident where a member was told to pay a tax bill after a TFSA holder withdrew all funds in advance of an audit. After the client had left, the member received a tax bill totalling $154,000 which included interest and penalties. The CRA has the right to go after the dealer if the client has already left. As a result, financial institutions providing TFSA’s are not allowing holders who are being audited to make any withdrawals.

The CRA recently began a project to target individuals whom it feels are using their TFSA’s to run trading businesses. Income from such activities are taxable and thus cannot be placed within a TFSA. TFSA’s with high balances and frequent transactions are being subject to higher scrutiny by the CRA.

In light of these recent events, the Investment Industry Association of Canada is advocating for clear guidelines that properly inform Canadians of what they can and cannot do with their TFSA’s.

A separate incident involved a man who operates a consulting business within the trading industry. The value of his account is well over $200,000. The man had just bought a house and needed the money for a down payment; however, he was told by his broker that he cannot withdraw any of his money because the CRA is auditing him. The individual reported that the gains he had made came largely from mining penny stocks that he had bought.

In the interim, although clients under audit cannot make withdrawals, they can still make trades within their TFSA.

Tax Free Savings Accounts are a great way to save money while sheltering from taxes. However, TFSA’s are subject to many rules which are important to understand. GTA Wealth Management Inc. can help. We have extensive experience in handling Canadian tax matters along with optimum integration with your financial planning requirements. At GTA Wealth Management Inc, our financial planners and tax accountants take into account the big picture in order to reduce your taxes and maximize your wealth.

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