He’s got the largest TFSA …but did the investment qualify?

The Financial Post believes they’ve found the individual with the largest TFSA account in Canada.
The article describes how the individual has an amazing $172,382 in his TFSA account.

The problem is, did this investment qualify for inclusion in the TFSA?

The financial planner in the article, purchased the penny stock Fannie Mae (FNMA) (OTCBB).

As per the CRA bulletin, ‘Prescribed Stock Exchanges In and Outside Canada’, this over-the-counter (OTC) security is not a qualified investment for a TFSA.

Should the Canada Revenue Agency (CRA) penalize him?

I’m no tax expert, but yes, I believe the rule has been broken.

Originally, I thought that the penalty would be to pay 1% of the market value of that investment for each of the three months (March 2013 – May 2013) that he held the security in his TFSA. However, a couple of readers have corrected me on this point. The 1% figure is the penalty for over contributions.

The actual penalty could be 50% of the fair market value of the property.

The financial planner in this article probably didn’t realize he had broken the rule. He should contact the CRA for clarification and pay any resulting penalty.

Update June 18, 2013 9:00 pm
Kudos to the Financial Post for updating their online article with the possible CRA implications.
The article now states that the Canada Revenue Agency has been contacted by the Financial Post.

CRA bulletins are often incomplete and subject to misinterpretation.
Here’s hoping that this gentleman gets a favourable CRA ruling and gets to keep the gains from his shrewd stock picking.

Update June 19, 2013 11:00 pm
The Financial Post updated the article with a quote from the CRA media representative in which she added, “since Fannie Mae is also listed on designated exchange, Mr. Hirani is allowed to hold it in his TFSA.”

Update June 21, 2013
The article was again updated. It sounds like the previous CRA statement was “somewhat” retracted. In it’s place is the following statement from the CRA.
“Given the wide variety of investments that exist, the CRA does not make determinations as to whether a particular investment is a qualified investment except in the context of an advance income tax ruling or audit.”
Although, they wouldn’t confirm this particular transaction, the CRA did provide the following general comments.
“Only the official market (i.e. regulated Stuttgart Stock Exchange) is considered a designated stock exchange for Canadian tax purposes. The unofficial market (i.e. the unregulated portion of the regulated Stuttgart Stock Exchange) does not qualify.”

Assuming this particular security was on the regulated side of the Stuttgart Stock Exchange, I would assume Mr. Hirani’s winnings are safe.

The story has also added a quote from Mr. Hirani, if the CRA ultimately claims the investment ineligible. He states, “He got approval from his bank before making the trade.”

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