• Samer Tohme

The case of Louie v Canada: When Tax-Free Savings Account gains become taxable

What is a Tax-Free Savings Account?

The Canadian Tax-Free Savings Account scheme was set up in 2009 as a way for taxpayers to set aside a tax-free investment income. Any contributions or withdrawals made to a TFSA are generally tax-free. However, it is important to note that contributions made to a TFSA are not deductible for income tax. Contributions are also capped at a maximum amount, where any contributions made over the limit will be penalized, with 1% tax on the highest excess per month.


There are some additional circumstances where TFSA gains are taxable. Under subsection 207.05(1) of The Income Tax Act (“The Act”), if an advantage was extended to the TFSA account holder, then the gains may be taxed.


For there to be an ‘advantage’, as defined by subsection 207.01(1b), there must be:


● an increase in the total fair market value of the TFSA property, alongside;

● a reasonable indication (if it is reasonable to consider, having regards to all the circumstances) that the increase can be attributed—directly or indirectly—to a series of transactions that would not have occurred in an open market where parties deal at arm's length and;

● a primary motivation to enable the individual to benefit from the tax exemption, under Part I, of any amount regarding the TFSA


For example, in the case of Louie v Canada, the Federal Court of Appeals (“The Federal Court”) set out to determine whether a series of swap transactions to a TFSA gave rise to such an advantage under The Act.

The Case of Louie v Canada

In the case of Louie v Canada, the taxpayer was an investor. Adept in her knowledge and experience of the stock market, she managed a trading account in addition to a self-directed RRSP account. She took advantage of the new TFSA scheme in 2009, opening an account. She transferred her stocks from her trading account to her TFSA and RRSP accounts in May 2009, to eliminate and defer the taxation on her future gains. The stocks with the highest upward momentum in price were shifted into her TFSA, whereas those with the most downward momentum in price were transferred from her TFSA. As the manager of her accounts, she chose which shares to transfer, and when. She carried out 71 of these TFSA swapping transactions in 2009, which ultimately increased the value of her TFSA.

She reached the maximum capped limit of contributions for 2009, which was $5,000. Her TFSA had a market value of $206,615 by the end of the year. After new legislation was brought in in 2009 to include swap transactions as an ‘advantage’ within The Act, she ceased to make any further swaps. By the end of 2010, her TFSA was worth $281,826 and fell to $220,485 by 2012.


She was reassessed by the CRA for 2009, 2010 and 2012, on the grounds that she had received an ‘advantage’ under The Act. She went on to appeal the reassessment to the Tax Court of Canada.

Louie v Canada: Findings of the Tax Court of Canada

The appeal was dismissed by the Tax Court for 2009 but was accepted for the tax years of 2010 and 2012. With regards to 2009, the Tax Court determined that she had received an advantage because the swap transactions were part of a series of transactions that would not have taken place at arm’s length in an open market. The Tax Court also determined that the primary reason behind the swaps were to benefit from the tax exemption.


In the case of 2010 and 2012, the Tax Court accepted the appeal—as although the value of the TFSA had increased, it was not due to swap transactions—finding that she had not received an advantage. This was based on a narrow interpretation of the phrase ‘directly or indirectly’.


The Canadian tax lawyer for the taxpayer went on to appeal the dismissal for 2009, and the CRA’s tax lawyer cross-appealed the decision for 2010 and 2012.

Louie v Canada: Findings of the Federal Court of Appeals

When the appeals were taken to The Federal Court, they ultimately dismissed the taxpayer’s appeal and accepted the cross-appeal from the CRA. The Federal Court was in agreement with the Tax Court that the swap transactions were part of a series of transactions, in accordance with subsection 248(10) of the ITA. The ITA definition of ‘series’ states that “any related transactions that are completed in contemplation of a series are deemed to be part of that series”.


Additionally, the Federal Court held that the Tax Court did not err by finding that the parties to the series of transactions were not dealing at arm's length. This was on the basis that the taxpayer was managing all of the swap transactions.


Finally, the Federal Court found that the primary intention of the transactions was to benefit from the tax-free status of the TFSA. The Federal Court made inquiries into the intentions of the swap transactions and found that the taxpayer had a strategy to move large amounts of value into the TFSA in the awareness that it would be exempt from tax.


Where the Federal Court differed from the Tax Court was in the interpretation of the phrase ‘directly or indirectly’. The Federal Court denied that the phrase ‘it is reasonable to consider, having regard to all the circumstances’ constrains the broader meaning of ‘directly or indirectly’, stating that the statutory context does not require or favour restriction of the meaning. Instead, they employed the ITA’s anti-avoidance approach from sections 207.07 and 207.05 to support a broad application of the term ‘advantage’. It was on this basis that the CRA’s cross-appeal was accepted over the taxpayer’s appeal for tax years 2010 and 2012.

Key Takeaway — TFSA gains can be taxable


While TFSA gains are generally tax-free, allowing Canadians to increase savings through tax-free investment incomes, there are exceptions to the rule. If you have been assessed for taxes payable for excess TFSA contributions, you must consult top Canadian tax lawyers who are experienced in navigating tax disputes with the CRA.

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