The Canada Revenue Agency (CRA) issued a warning May 13 to Canadians about tax schemes where promoters are claiming that individuals can transfer funds out of their registered retirement savings plan (RRSP) or registered retirement income fund (RRIF) into a tax-free savings account (TFSA) without paying taxes and without regard to the annual TFSA contribution limit. 

The CRA says those who choose to participate in these schemes and those who promote them “face serious tax consequences, which can include the imposition of significant tax liabilities, penalties, court fines, and even jail time.” 

This “TFSA Maximizer scheme” is typically marketed to sophisticated investors who have large balances in an RRSP (or RRIF) and in a TFSA and significant equity in a personal residence, explains the CRA. The key elements of the scheme are: 

  • the promoter operates a special-purpose mortgage investment company (MIC) that "invests" only in mortgage loans to scheme participants 
  • the MIC issues two classes of shares – one paying dividends at a low rate and the other paying dividends at a much higher rate 
  • the participant buys low dividends shares of the MIC in the RRSP or RRIF and high dividend shares in the TFSA 
  • the MIC lends the share proceeds back to the participant in the form of a first and a second mortgage loan, secured by the personal residence and the TFSA balance and bearing interest at rates corresponding to the dividend rates on the two classes of MIC shares 
  • the participant invests the loan proceeds with the promoter and earns taxable investment income 
  • the participant makes annual RRSP or RRIF withdrawals and claims a fully offsetting interest deduction 
  • After several years of participating in the scheme, the participant is supposedly able to shift the entire RRSP balance to the TFSA in a way that the promoter claims is "tax-free" and is not subject to the annual TFSA contribution limit. 

Promoters of TSFA Maximizer schemes claim that the high interest rate paid on the second MIC loan is normal for second residential mortgages and explains the corresponding high dividend rate on the second class of MIC shares, says the CRA, adding that “in reality, however, the entire arrangement is commercially unreasonable. The lender's actual credit risk is low because the borrowers are all wealthy participants in the scheme who are unlikely to default on the mortgages. Moreover, the second high-interest mortgage is secured both by the participant's residence and by the growing TFSA balance. Under these circumstances, the high rate of interest on the second mortgage and the high dividend rate on the second class of shares are not justified as the participants are essentially borrowing from themselves.” 

The CRA says that as a result, the increase in the value of the TFSA would be considered an advantage subject to 100% advantage tax. In addition, the interest paid on the MIC loan may not be fully deductible. 

The CRA encourages taxpayers who have participated in a TFSA maximizer scheme to correct their tax affairs through the Voluntary Disclosures Program (VDP):