TFSA changes, expected changes anyway

It was brought to my attention this morning that the government has made a change to the TFSA rules regarding over contributions.

The official Government of Canada release.

The juicy bits:

"...some TFSA holders are attempting to generate a rate of return on deliberate overcontributions over a short period of time sufficient to outweigh the cost of the 1% tax. On its introduction, it was not anticipated that the TFSA would be subject to this type of deliberate overcontribution."

DUH!... why would they not expect that? Anyone with half a brain and a plan probably thought of this already.

Originally the overcontribution was subject to a 1% per month tax on the overcontribution amount. I figured that I could easily beat that and create a positive return with that considered and I could stand to gain quicker due to a larger capital base to work from. As I was playing and could not guarantee a return I did not pursue the idea. The best part was the the return was not taxable as ONLY the overcontribution was taxable.

"Under the proposed amendments, any income reasonably attributable to deliberate overcontributions will be made subject to the existing advantage rules (as described above) and taxed accordingly. Pursuant to the advantage rules, the tax payable on the income will be 100%."

This means that only the applicable income tax will be levied on the profits in addition to the 1%, not that the entire amount will be confiscated. I could see this being waived where a particular position required more than the $5,000, but not by too much more, and the expectation of return was not short term nor that much greater then the 1%...but I have no intention of testing this.

Now that I am getting decent results it wouldn't be an advantage with the the new ruling especially as my positions are all less then $400 (most are currently less than $120) so adding even a few hundred dollars and being taxed on the full profit would end up costing my 1% per month more than if I just used my margin account AND making my tax return more complicated.

I have $5K of room in the new year, which is fast approaching now anyway.

As it is I was concerned about the government taking a dim view of active trading producing larger results and perhaps changing the rules due to that alone. I am surprised it took this long for them to close this loophole.

I wonder how large these overcontributions were that triggered the red flag in the first place and why the institution managing the account would not disallow those excessive deposits, they could have... but I suppose the current legislation did not give them the authority to do so.

Jeff.