USING A TAX-FREE SAVINGS ACCOUNT AS COLLATERAL

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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Copyright 2019 ISSN 0382-7038 All Rights Reserved

Authors:
James W. Kraft, CPA, CA, MTAX, TEP, CFP, FEA, CLU
Deborah Kraft, MTAX, LLM, TEP, CFP, CLU
Published by:
The Institute
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About The Author

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