If the TFSA trust acquires a prohibited investment or if previously acquired property becomes prohibited, the investment will be subject to a special tax equal to 50% of the fair market value (FMV) of the investment, and the holder must file Form RC243, Tax-Free Savings Account (TFSA) Return.

The tax is refundable in certain circumstances. For more information, see Refund of taxes paid on non-qualified or prohibited investments.

If the prohibited investment ceases to be a prohibited investment while it is held by the TFSA trust, the TFSA trust is considered to have disposed of and immediately re-acquired the property at its FMV.

The holder is also liable for the 100% advantage tax on income earned and capital gains realized on prohibited investments. The 100% advantage tax applies to income earned, and the portion of any realized capital gain that accrued, regardless of when the prohibited investment generating the income or gain was acquired.

Obligations of the TFSA issuer

The issuer of a TFSA must exercise the care, diligence and skill of a reasonable prudent person to minimize the possibility that a trust governed by the arrangement holds a non-qualified investment.

If the issuer fails to comply with this obligation, the issuer is liable to a penalty under the Income Tax Act (ITA).

The issuer is also required to notify the holder of the TFSA in prescribed Form and manner before March of a calendar year, if at any time in the preceding year the TFSA trust acquired or disposed of a non-qualified investment, or if an investment became or ceased to be a non-qualified investment.

Forms and publications

• Form RC243, Tax-Free Savings Account (TFSA) Return
• Income tax Folio, S3-F10-C2, Prohibited Investments – RRSPs, RESPs, RRIFs, RDSPs and TFSAs