The Department of Finance is cracking down on what it calls “the use of inappropriate transactions to draw excessive benefits” from Tax-Free Savings Accounts. The amendment targets deliberate overcontributions to TFSAs, holding non-qualified investments in TFSAs and swap transactions between TFSAs and other accounts. Penalizing the first two strategies makes sense but it is not clear what problem a blanket ban on swap transactions is trying to achieve. Finance describes the problem as follows:
“Asset transfer transactions” (sometimes known as “swap transactions”), in this context, refer to transfers of property (other than cash) for cash or other property between accounts (for example, a Registered Retirement Savings Plan (RRSP) and another registered account) that are generally not treated as a withdrawal and re-contribution, but instead as a straightforward purchase and sale. Subject to the application of existing anti-avoidance rules in the Income Tax Act, these transfers, when performed on a frequent basis with a view to exploiting small changes in asset value, could potentially be used to shift value from, for example, an RRSP to a TFSA without paying tax, in the absence of any real intention to dispose of the asset.
Michael James wrote a pretty good explanation on how frequent swaps between a RRSP and a TFSA can slowly transfer assets from the former to the latter, which can then be withdrawn tax-free. But banning swaps entirely doesn’t really solve the problem. Though it is more expensive, selling an asset in one account and buying it in another achieves the same result that a swap does and is still open for someone wanting to shift value from a RRSP to a TFSA. So, why ban swap transactions altogether? Informed speculation is welcome.