TFSA Investing v.s. Trading | Page 2 | Tax Free Savings Accounts | Discussion forum

Just putting a positive view on your chances of prevailing if your case has merit, I don't at all share the view of some that CRA can exercise its authority arbitrarily, etc. CRA is bound by legal precedent, and in fact it acts accordingly.

And, for those who are interested, Tax Court's no big deal, I think about 50 or so locations in Canada for hearings, most cases you can represent yourself with no fees, wrapped up in less than a day, and the onus is on you to prove your case on a balance of probabilities, a lower bar than guilty until proven innocent. The judges often are happy to put CRA in its place if zealous officials have overstepped. Most cases do lose, but that's because a lot of people appeal with no real basis, they're just mad and want to blame someone else for their tax errors. (As a side note, CRA also has an Appeals division, very easy process, they're usually ready to cut a deal if the position is reasonable, vast majority of disputes settled this way.)

I do call CRA when I need help, no need to call the judges as CRA's answers are determined by what the judges have ruled over the years. If you are interested, though, all decisions over the years are easily accessed online at the Tax Court site.

It’s very simple! Frequent trading is about quick profits and the TFSA is for long term investment. If you have a portfolio and rebalance and perhaps switch stocks once a year or even quarterly, that is fine. Trading multiple days each week or even once a week is clearly going to be tagged by the CRA. I wouldn’t even try trading once a month.

smayer97 said
The challenge with this whole topic is the fact that the CRA does not have objective facts to define when one is crossing the line.... the main guiding principle is intent.

Just for comparison, in the US it is far better defined. First, they do allow running a business in their equivalent of our TFSA, the ROTH IRA. Though I do not know the specific rules, the general principle is that investments are taxed at different rates based on how long one holds a position; clear, well-defined rules, so you know what applies. Admittedly, it does become onerous but at least it is clear and OBJECTIVE.

Sadly, not so in Canada. Pros & cons for each. Not sure which is better but it is what it is. Though there is guidance due to precedent set by courts, it is still subjective. Hence the OP's struggle, and the many differing opinions here.  

Absolutely, but it is known that quick profit making by selling and buying every week is not what the TFSA was created for. It was created to give tax free gains for long term investment that is primarily mutual funds and savings, but can include individual bonds and stocks. In other words, if you are investing in a TFSA for profits shorter than 3 months at a time, it will be tagged for sure and depending on the CRA’s view of your transactions such as swapping stocks to make profit even over 3 months. It really isn’t hard to see someone’s transaction history as a portfolio rebalancing versus profits from changing stocks. If you plan on making many changes between various different stocks, you are drawing attention to yourself and risking penalties. Unless you can get a specified, in writing, approval of your plans, I wouldn’t bother. Just do frequent trading in a non-registered account.

I don't think CRA is nearly as 'concerned' as people make it out to be with respect to trading vs investing. CRA's line in the sand is related to simply not using the TFSA for business purposes.

If one was to just ignore talking about the TFSA for a moment and think about it more practically on a non-registered basis, an individual who is heavily into trading might have to declare their gains as 'business income' revenue, not capital gains as an investor would, and at the same time able to write off business expenses as an operating expense of that business. Similarly in real estate, flippers buy, renovate and sell houses and declare their gains as business income, not capital gains like someone who has a day job and simply owns a bit of investment real estate on the side.

IOW, the tipping point is where the activities of an individual cross over from investing as a sideline, to running a business. There are many shades of grey at the transition point, not easily defined. This is the same fuzzy line that occurs with TFSAs. At what point does the activity become running a business versus a retail investor simply looking to build a portfolio? One would best not test those shades of grey to run foul of CRA. Stay away from the crest of that hill.

As I understand it, the key cases where CRA took exception to 'abuse of the TFSA' included cases where professional traders with credentials and career paths spent a good part of their time and experience building their TFSAs via frequent trading. IOW, running a business.

I would doubt many rank amateurs without professional CFP type designation participating in this forum would ever be considered to be more than a retail investor. Frequent traders tend to blow their brains out in any event. They talk a good game in increasing market trends, but they disappear off the face of the earth in downward trending markets.

TFSA_Newbie said

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RRSP's don't make sense given our income levels or lack there of and the CRA has not limited what investment tools can be used to generate wealth w/i the TFSA. i.e. forced us to only purchase GICs.

Maybe this will help.

Person 1
Stock ABC is $10.00 , they own 10 shares and it pulls back 10% with a market value now of $9.00. However at the end of the month the stock rallies and closes at $9.50. They have lost $5.00

Person 2
Uses a stop loss of 1% and closes their position at $9.90 losing $1.00. Since they cannot time the market they repurchase 10 shares back at $9.40 and at the end of the month make $1.

Now overall they have Made $1, lost $1, have 10 shares at $9.50, PLUS they still have their $5 by using a stop loss ($99 cash - buying 10 shares at $9,40). Hence they still have $100.00 at the end of the month and the other person $95.00

Now the only reason they cannot due this is b/c they are afraid it will increase their frequency of trading? So, they should take a 5% loss to comply with the CRA???

No one buys a stock wanting to lose money.

Yes, it can happen as all stocks are speculative. But why leave things to chance if you can sail your own ship?
…

You aren't trying to avoid a loss. You are trying to make that $1/share on the recovery.

If I can see through that, then CRA and a Tax Court judge would easily see through that too.

An investor would expect the $10 stock to be $20 in ten years, from price appreciation and dividends. The investor wouldn't care if the stock happens to dip temporarily to $9.50 the following week. The investor would do nothing on such a dip. That's just life if one had years ago bought at $10 instead of $9.50 a stock that's now $20.

If one believed the stock would recover back to $10 in a few weeks, then why do anything?

Perhaps one isn't confident that it would recover back to at least $10. Then, the stock can't be an investment if one is not sure of it retaining its value. Not an investment means it must be inventory then. Buying and selling inventory is a business.

Can't be investing if one is intending to profit from short term prices movements. That's a stock trading business.

Either way, it is running a business in a TFSA.

All stocks seem speculative to you because of your short time horizon. You can be investing in stocks, real estate, or art pieces with a horizon of only a few years. Intending to liquidate within a few years is a sign of a stock trader, real estate flipper, or an art dealer.

I agree with AltaRed, CRA is only targeting a few pros with very large TFSA balances and then are, as usual, relying on media reports to scare 90% of the rest of us into voluntary compliance, that's good enough for them (that's why you're hesitant, TFSA_Newbie, media reports). CRA is unionized public sector, they hardly do anything, I'm guessing no-one on here personally knows anyone who has been reassessed by CRA re. this issue. Here's an excerpt from a 2019 Globe & Mail article, they got an immaterial just over $1 million per year over 9 years, that's what they claim: "Between 2009 and 2017, the CRA has assessed approximately $114-million in taxes resulting from audits of TFSAs, with approximately 10 per cent of that amount from audits that specifically targeted TFSA accounts that were seen as carrying on a business."

Make sure you don't just focus on frequency of transactions, there are more criteria. For example see this article:
https://www6.royalbank.com/en/di/hubs/investing-academy/article/frequent-trading-in-your-registered-accounts/kp1bu4tc

I don't see any worries for you, based on what you're describing, though if your TFSA hits a big enough balance their computer might flag it for a closer look. But if you truly believe your generation's views are at odds with archaic CRA's, that it's a new world and frequent trading is ubiquitous among the young so should be viewed differently than in the past, then I'd fire up your social media to find a few folks whose TFSAs have been reassessed improperly in your view and take one to Tax Court to set a precedent CRA has to follow. (That, aside from legislative amendments, is how CRA policy is changed.) I'm betting, aside from the few multi-millionaire pros I mentioned earlier, there are no such people out there but maybe you'll find one.

There you go, all sorts of opinions! I personally don't see using stop-losses once a week, on its own, enough to be operating a business but Judge Norman1 might rule against you. That's why we have Tax Courts, Federal Court of Appeal, etc., and why the rules are ever-evolving.

Again I feel CRA likes to get a few big fish and then publicize the heck out of it so that the smaller fish voluntarily get in line, then back to sleep, so it would be in my nature not to worry until my account was big enough. And then I would just convert to a few dividend payers with the millions and leave them alone.