This error will cost you 50% of your money lost in your TFSA. Here is what happened. I was recently reviewing all the rules related to TFSA, Tax-Free Savings Account, and I found that CRA, Canada Revenue Agency, can easily make you basically a huge fine if you purchase a wrong stock.
And in the end, it is you who ends up losing half of your investment for nothing. Just because you didn't know this. There are actions you need to take before the end of the calendar year, before December 31st. In this video, I will put all the information about how to avoid such a mistake. If you already did it, you will see how you can fix the situation.
I will show you what is called TFSA return and how broker treat the issue. I will use a real case scenario, so it is easy for you to understand. All in all, watching this video will save you a ton of money and unpleasant interaction with the taxman. Hello! My name is Alex and this is Fine Finance.
First, if you think about opening TFSA or you just don't know what TFSA is, don't worry I'm preparing an ultimate TFSA guide so subscribe to get it. Also, please click that like button because what you are about to see is going to save you from troubles with the CRA because at least you will save hours of waiting time on the phone To have an answer from a CRA and a huge fine as well. Just remember that I am not a financial advisor, do your own research. I just did it for myself and that's what I'm sharing with you. I will share all the screenshots and the links to the source, which is the CRA website.
All right, first the issue, Odyssey and non-qualified holdings in TFSA. You probably see such headlines already. CRA took it all from a TFSA. which is a tax-free account.
So why? It is so easy today like never before to open your TFSA tax-free savings account and buy stocks there. What if I tell you that there are plenty of stocks you should not buy inside your TFSA?
You probably think that broker should prevent this from happening. I wish! You should know that TFSA has qualified, non-qualified and prohibited holdings.
Here's a quick look on what qualified investments are in registered accounts, including TFSA, you can pause here and read. Please do so. Basically, a lot of what you might think should qualify is in there.
Now, let's assume you watched a YouTuber talking about a stock, for example, a penny stock. Let's take Planet13, for example. And you went to your online broker in your self-directing account, TaxRu's Amings account, and typed Planet13 in the search field.
Then you go click and buy. And it worked just fine. You're glad now you have it in your TFSA.
Interesting fact that a broker will do the conversion for you from Canadian dollars to American dollars. Without you. Easy, right? But then you realize that it trades on something called PINX.
What is that? Let's say you invested a thousand dollars in this stock. The problem with this is that this particular stock is a non-qualified one in your TFSA.
This means you have to pay 50% to CRA on the invested value. This is clearly stated in here. In addition, all that gain in this asset is taxable at the highest rate. Oof, again. Basically, you end up paying more by investing in this stock inside your self-directed TFSA account rather than in a standard trading account because you pay this 50% additional tax on your investment.
Two, will broker prevent it? Do you remember this screen? Do you see a TFSA label here?
It means that you can buy it inside your TFSA without any check from a broker site at all. Online brokers made it much easier to buy a stock but this still means you can do tax-related errors easier as well. I honestly do not understand why a broker does not implement the simple check or at least warning OPAP saying that this might not be a qualified investment, check with CRA.
At the same time, this broker, when acting as a trustee, must report to CRA all non-qualified assets you have in your TFSA. I have no words. To report non-qualified assets, they must know what non-qualified is. Yet, they let new investors to do this error again and again.
Such a waste of time for everyone! How to know if a stock is a non-qualified one? If you want to know if a stock that you choose can be added to your TFSA, there is a list of qualified stock exchanges on the CRE website.
I put the link in the description, but here is how it looks like at the beginning of 2021. But please do, I put a lot of links in the description, so you can check all the helpful resources there, different links to CRE websites and... This is really the source you should be reading before doing any action. Almost all major exchanges are here and you can see there are many different countries as well.
None of the OTC places are here. If you google what PINX is, it is an OTC. This means that LEN13 under ticker PLNHF is a non-qualified stock.
So 4. What actions to take? So what you should do and what you should do. I mean, that's what I am going to do, but I'm just sharing with you what you should, you should do something at least, right? Don't forget, I'm not a qualified financial advisor.
I don't have any licenses, okay? But okay, let's assume what you should do if you bought this and later you find out that you should have not had this stock in your TFSA. What is the way to proceed? Don't panic, okay? There is a way.
By the way, to be honest, I did not pick... just a random stock here. As I said, when I started to review my TFSA, I found this one being non-qualified. So I was a bit shocked at first, really. I was not sure what to do with this one.
So again, I went, spent many hours reading all the documentation from CRA to understand what is the best way to do it. It was one of my first stock that I purchased and I opened my TFSA account just before it. So I have to pay now this huge tax.
Here's what I'm going to do. That is what I have read on the CRA website again. As you see it here, if registered plan acquires a non-qualified investment, blah, blah, blah, liable for the tax for any calendar year must file TFSA return.
Now here's your question. What if I do not file this return and hope that CRA will never audit my account? In this case, It could work, probably, I don't know, but I prefer to deal with things as they happen, and not just hide praying under the pillow, you know? Especially when audited and discovered, which is easy discoverable as well, you will have to pay penalties.
Late filling penalty of 5% of balance owing, and 1% for each full month since then. So here is how this TFSA return looks like. Again, I put all the links to those resources in the description.
The deadline to file TFSA return is June 30th, so you have still plenty of time to read and understand for yourself what exactly was done wrong. So you still have time, but you probably should do before the end of the calendar year. I will explain it in the next chapter, okay?
This part is where you put your non-qualified investment. As you see, it takes 50%. It is automatically calculated for me. Again, and other proof that this is real.
And here are some details about penalties, deadlines and other things. 5. What to do to fix this issue in your TFSA? Finally, the most interesting part and how to fix it and get your money back, hopefully.
We all hope that you can avoid legally paying these penalties. CRA admits that you can get your 50% tax money back. To do it, You have to supply a letter with explanations why you did this.
In my case, it was an obvious mistake. Since Plan 13 is traded on a Canadian stock exchange under the ticker PLTH, and oh yes, it is in the list of qualified stock exchanges. Since it was one of my first trades under a TFSA account, I should not say account, because TFSA already has an account in it, right? tax-free savings account so from here now i am saying just tfc okay and i was looking for this company i actually purchased the wrong assets yeah it is it it is it is easy to prove the second thing i need to do which i already did actually is to dispose of these assets sell it and better to do this before the end of the calendar year so before december 31st If you're lucky, another option is that the stock stops being non-qualified one without you actually doing anything.
This happens when it starts trading on a qualified exchange. But I prefer to sell it and right after I sell, I bought the stock of the same company on a qualified exchange. This is what I do. I do not guarantee that it will work, but from what I have read, this is the way.
Again, I am not a qualified financial advisor. Please do your own research. I did mine and that's what I am sharing with you again. So to resume, I have one asset that is not a qualified one. To fix the issue with the CRA, I have to do...
this. First, sell the asset before the end of the calendar year, December 31st, in which I bought it. Immediately, I bought the same company stock in a qualified exchange. Then, I sent TFSA return before the June 30th.
Add a letter with explanations and screenshots why I made this mistake. This clearly was a mistake. It was not intentional.
Okay, then waiting for the CRA to respond to me was, I hope, good news about tax refund. So I do not have to pay anything at the end legally. Let me know if you have this situation already and what did you do about it.
I'm pretty sure I'm not alone and I'm pretty sure this will help a lot of other people watching this video and generally in this investors community. Please like and subscribe to make this channel live. Thank you for being here with me.
See you soon investors. Bye.