USING A TAX-FREE SAVINGS ACCOUNT AS COLLATERAL
Talk to us about whether it’s wise or not to use your TFSA as collateral.Cassie Schneider
Tax-Free Savings Accounts (TFSA) have become integral to the financial plans of many Canadians. During the 10-years since inception, the TFSA has proven to be a multi-purpose vehicle helping Canadians meet their long-term savings goals.
When structuring a loan, a TFSA plan holder is permitted to use the interest in their TFSA to secure the loan. This is permissible when the terms of the loan are similar to that of an arm’s length loan, and where none of the main purposes of the loan are to enable another person to benefit from the tax-exempt nature of the TFSA.
If a TFSA is used to secure a loan, the plan holder must be prepared for the consequences that arise if the lender claims on the security.
A recent query to the Canada Revenue Agency (CRA) addressed the issue of using a TFSA as security for a loan. The question posed to the CRA was “Would the lender’s realization of their security be considered a distribution from the TFSA?”
The CRA’s response is that the payment from the TFSA to the plan holder’s creditor constitutes a distribution from the TFSA. As such, because the amount paid to the creditor is a distribution from the plan, the same amount is added back to the individual’s TFSA contribution room the following year.
This commentary is published by The Institute in consultation with an editorial board comprised of recognized authorities in the fields of law, life insurance and estate administration. The Institute is the professional organization that administers and promotes the CLU® and CHS® designations in Canada.
The articles in Comment are not intended to provide legal, accounting or other advice in individual circumstances. Seek professional assistance before acting upon information included in this publication.
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