Fix a TFSA Tax Mistake by December 31 or Wait Up to a Year
A TFSA or RRSP that holds a prohibited or non-qualified investment triggers a 50% tax the moment it’s acquired, refundable under section 207.04 if the holding is disposed of in time. Dispose of it inside the same calendar year the tax arose and the refund cancels the tax on the return: nothing is paid. Cross a December 31 first, and the tax is paid in full and held for months, sometimes most of a year, before it comes back. Unlike that 50% tax, the 100% advantage tax that can apply on top of it carries no refund route at all, as we covered in the advantage tax on TFSAs and RRSPs.
Both worked cases below assume one gate is already satisfied. Under 207.04(4)(b)(i), the refund is nil if it’s “reasonable to consider that the controlling individual knew, or ought to have known,” at acquisition, that the property was or would become offside, no matter how fast it’s later sold, and that test is exactly the kind of thing that gets disputed. Miss the gate and the routes left are the discretionary waiver in 207.06(2), which applies “where the Minister considers it just and equitable to do so having regard to all the circumstances,” or an objection and appeal, since 207.07(3) applies Division J of Part I to this tax. A related rule, 207.04(3), deems a property that’s both prohibited and non-qualified to remain only prohibited; the tax and refund are identical either way, so it changes none of the numbers below.
Sell before December 31 and it nets to zero
Three provisions decide whether the refund cancels the tax on the return. 207.04(4) grants “a refund for the year” the trust disposes of the property, so the refund belongs to the disposal year, not the year the tax arose. 207.01(1) defines “allowable refund” for a calendar year as “the total of all amounts each of which is a refund, for the year, to which the person is entitled under subsection 207.04(4).” 207.07(1)(b) then requires paying only “the amount, if any, by which” tax payable for the year exceeds that allowable refund. So the tax and refund net to nothing only when the acquisition and the disposal fall in the same calendar year.
Case 1, acquired and disposed inside calendar 2026 on an illustrative $40,000 property: tax payable $20,000.00, allowable refund $20,000.00, amount payable under Part XI.01 is $0.00. That’s scoped to this tax only: the trust may still owe ordinary Part I tax on income the holding produced while offside, which is what creates the specified non-qualified investment income covered further down.
Case 2, acquired 2026-12-31 and disposed at some point in 2027: tax payable for 2026 is still $20,000.00, but the allowable refund for 2026 is $0.00, since no disposal happened that year. The full $20,000.00, filed on the applicable form (RC243 for a TFSA, RC339 for an RRSP, RRIF, RESP or RDSP, RC728 for an FHSA), is paid on 2027-06-30, 184 days before 2027-12-31, the last day the disposal that reverses it can still happen; that payment date is not a missed deadline. The refund only becomes an allowable refund for 2027, claimed on the 2027 return.
How long that money is gone is a range, not one figure, because the holder controls one end of it. Nothing in section 207.07 sets a minimum wait; the 185-day floor follows from the refund being “for the year” of disposal, so it can’t be claimed until calendar 2027 has ended. Waiting for the 2027 return’s own deadline instead makes it 366 days. Add assessment time too: under 207.07(2)(a) the Minister “may… refund without application” on sending the notice of assessment, but 207.07(2)(b) gives a second, mandatory lever: the Minister “shall, with all due dispatch, make the refund… if an application for it has been made in writing,” alongside filing the return itself as early as calendar 2027 allows.
The gap between the two cases isn’t the mistake or the amount. It’s only which side of December 31 the disposal lands on.
The clock doesn’t always start when you buy
Everything above assumes the tax arose on the date of purchase. It does not always. Under 207.01(6), “if, at any time, a property held by a trust governed by a registered plan becomes, or ceases to be, a prohibited investment or non-qualified investment for the trust, the trust is deemed to have disposed of the property immediately before that time for proceeds of disposition equal to the fair market value of the property at that time and to have reacquired the property at that time at a cost equal to that fair market value.” (What actually makes a holding non-qualified in the first place, including a delisting or a fund losing designated status, is covered in our explainer on the TFSA non-qualified investment tax.)
That deemed reacquisition is the “acquisition” 207.04(1) taxes. So for a holding that went offside while already held, rather than bought offside, the tax arises in the year it became offside, the 50% base is fair market value at that moment rather than the purchase price, and every deadline above runs from that date.
Whichever date starts the clock, the outer limit is the same provision. 207.04(4)(b)(ii) reduces the refund to nil where the property is “not disposed of by the trust before the end of the calendar year following the calendar year in which the tax arose, or any later time that the Minister considers reasonable in the circumstances.” That closing clause is discretion, not a right. Because the cut-off is fixed by the year rather than by elapsed time, the same rule leaves very different amounts of room depending on where in the year the clock started.
| Acquired or deemed reacquired | Deadline | Days available |
|---|---|---|
| 2026-01-02 | 2027-12-31 | 728 |
| 2026-06-30 | 2027-12-31 | 549 |
| 2026-12-31 | 2027-12-31 | 365 |
The arithmetic is unchanged regardless of pathway: a January date leaves 728 days, a December date leaves 365, a difference of 363 days, a ratio of 1.99x. Because the deemed reacquisition is valued at that moment’s fair market value, a holding that had already fallen a long way before going offside is taxed on the reduced value, not on what was originally paid.
Past a 50% decline, the unrefunded tax is worth more than what’s left
207.04(2) fixes the tax at “50% of the fair market value of the property at the time referred to in that subsection,” meaning at acquisition or deemed reacquisition. The refund under 207.04(4)(a) returns “the amount of the tax so imposed,” and neither figure moves with the later price. (If you’re not sure whether a holding counts as non-qualified or prohibited, our guide to the prohibited investment tax in a TFSA covers that distinction; section 207.04 taxes and refunds both the same way.)
On the same illustrative $40,000 value, the tax is $20,000.00. If the position falls to $12,000.00 and the sale happens in time, the refund is still the full $20,000.00, unaffected by the $28,000.00 loss. Miss the window and the $20,000.00 tax stands permanently against a holding now worth $12,000.00, an $8,000.00 excess of tax over what remains. That isn’t particular to $40,000: tax equals 50% of the base value, current value equals base value times one minus the loss fraction, so the unrefunded tax exceeds what’s left the moment the loss passes 50%, for any base value at all.
The 90-day clock that isn’t on any calendar in advance
Under 207.06(4), the Minister may require a payment out of the plan “within 90 days of receipt of the notice,” of at least the specified non-qualified investment income. That income is defined “in respect of a registered plan and its controlling individual” as income or a capital gain “reasonably attributable, directly or indirectly, to an amount in respect of which tax was payable under Part I by a trust governed by the registered plan”: it exists only where the trust has already paid ordinary income tax on the underlying amount. Under the “advantage” definition’s paragraph (b)(iv), that income itself becomes an advantage if it isn’t paid out inside those 90 days, taxed under 207.05(2)(a) at 100% of the fair market value of the benefit. On a late-acquisition holding, this window can close before the payment deadline on the underlying 50% tax even arrives.
Buying it out of the plan yourself is a conditional escape hatch
A holder who can’t find a buyer can buy the property out of the plan directly. Paragraph (c) of the exclusions to the “swap transaction” definition takes a transfer of a prohibited or non-qualified investment out of the plan for consideration out of the swap rules, but only “in circumstances where the controlling individual is entitled to a refund under subsection 207.04(4) on the transfer.” The buy-out is a cure only because it rides on that same refund entitlement and deadline.
The price has to be right too, and the CRA’s folio closes it both ways. Sell above fair market value and the sale is “not commercially reasonable” and is itself an advantage, taxed under 207.05(2)(a) at 100% of the fair market value of that benefit. Sell below fair market value, out of an RRSP, RRIF, RESP, RDSP or FHSA, and it’s a registered plan strip, taxed under 207.05(2)(c) at 100% of the amount of the strip, the reduction in the plan’s value that resulted. The TFSA is absent from that list because the statute puts it there: “registered plan strip” is defined as applying “in respect of a registered plan that is not a TFSA.” That’s a statutory exclusion, not a gap, and it doesn’t establish that a below-FMV TFSA sale is safe; other limbs of the advantage definition go untested here. Miss the 207.04(4) deadline and the buy-out stops being a cure: it becomes a swap transaction, an event listed under paragraph (b)(iii) of the “advantage” definition, and any resulting increase in the plan’s value is then taxed under 207.05(2)(a) at 100% of the fair market value of that increase.
Get advice before acting on any of this
The discretionary waivers in 207.06 turn on facts the Minister weighs case by case, and the amounts at stake scale with whatever the property was actually worth at acquisition or deemed reacquisition, not the illustrative $40,000 used here. Anyone weighing a buy-out, a waiver request, or an objection should talk to a tax professional who can look at the actual numbers and dates before deciding anything.
Disclaimer: The content on bestcanadianstocks.ca is for informational and entertainment purposes only and does not constitute financial advice. Past performance is not indicative of future results. Always consult a qualified financial advisor before making investment decisions. Statutory text is from the Income Tax Act on the Justice Laws Website, current to September 3, 2026 and last amended June 18, 2026. Sections 207.01, 207.02 and 207.04 to 207.07 were fetched September 26 to 28, 2026. Administrative positions and the folio paragraph numbering are from Canada Revenue Agency Income Tax Folio S3-F10-C3, Advantages, last modified May 28, 2024. The $40,000 acquisition value and every amount derived from it are illustrative and are labelled as such in the article. All day counts and deadline dates are our own arithmetic on the statutory tests.
