TFSA Swapping - Guilty | Tax Free Savings Accounts | Discussion forum

Turning a $5,000 TFSA into $200,000 TFSA is not a problem. How one does it is the issue.

One can't do it by repeatedly swapping stocks out of the TFSA in return for cash above fair market value and swapping stocks into the TFSA in return for cash below fair market value like the woman did:

For all of the swap transactions, the price selected for the shares swapped out of her TFSA was the highest price at which they had traded during the day up to the time of the swap. Conversely, for the shares swapped into her TFSA, the price chosen was the lowest at which they had traded.

As well, I found earlier that Income Tax Act subsection 146.2(6) excludes business income actively generated in a TFSA from being tax free.

The swaps were her TFSA buying from and selling to herself. Not buying from and selling to someone arms length over a stock exchange.

She repeated directed her TFSA to sell shares to her regular account at above market values and to buy the shares back from her regular account at below market values. There was no actual net profit; the shares just moved back and forth between her TFSA brokerage account and her regular brokerage account.

However, each round trip resulted in more cash in the TFSA account, from her regular account, without using up any TFSA contribution room.

Though the fact that someone has a large TFSA balance might draw CRA's attention, there is nothing wrong per se with unusually large returns. For example, if you buy shares that explode in value while in your TFSA good for you, no problem.

There are lots of rules re TFSAs that most don't know about. There are prohibited investments, you can't do business activity via a TFSA (i.e. regular, continuous profit-seeking activity) as Norman1 points out, etc. Also prohibited are "investments or transactions that are structured so as to artificially shift value into or out of the plan or result in certain other supplementary advantages" and swaps are specifically listed as being one of these "advantages".

These rules don't matter for 99% of TFSA contributors but if you're going to do something convoluted or out of the norm then it might be an idea to check the rules or be prepared to go to court to let a judge decide if you or CRA is interpreting the law's intent correctly.

Buying and selling shares between one's TFSA and oneself (swapping) using artificially low/high prices was never legal. All TFSA asset swapping, regardless of price used, is now explicitly banned.

I think you missed the point that she didn't really make $200,000 in her TFSA. What she did was, through a series of swap transactions, got an additional $200,000 of her assets from outside her TFSA into her TFSA in less than one year.

Flipping shares, houses, or laundry detergent is perfectly legal. But, those activities are "adventures in the nature of trade" that are activities of a business and not considered to be investing.

Taxation of business gains is different than that of investment gains.

There's lots of legal history in this area that predates the birth of the TFSA in 2009 and even before the start of Canadian taxes on capital gains in 1972. For example, I found a case earlier about someone using the principal residence tax exemption to avoid taxes on their seven flipped houses.

Norman1 said
I think you missed the point that she didn't really make $200,000 in her TFSA. What she did was, through a series of swap transactions, got an additional $200,000 of her assets from outside her TFSA into her TFSA in less than one year.
  

That is the key point. An illegal transfer of assets into the TFSA. Hard to believe people think they can 'cheat' the system like that. It ultimately cost here dearly.

She was quite audacious.

2009 was the first year TFSA's were available. She opened a TFSA with TD Waterhouse in January 2009. Made the maximum $5,000 contribution. By December 31, 2009 value of her TFSA, with the 71 swaps, was $206,615.09!

Per CRA, "Some of the factors to be considered in ascertaining whether the taxpayer's course of conduct indicates the carrying on of a business are as follows:
(a) frequency of transactions - a history of extensive buying and selling of securities or of a quick turnover of properties,
(b) period of ownership - securities are usually owned only for a short period of time,
(c) knowledge of securities markets - the taxpayer has some knowledge of or experience in the securities markets,
(d) security transactions form a part of a taxpayer's ordinary business,
(e) time spent - a substantial part of the taxpayer's time is spent studying the securities markets and investigating potential purchases,
(f) financing - security purchases are financed primarily on margin or by some other form of debt,
(g) advertising - the taxpayer has advertised or otherwise made it known that he is willing to purchase securities, and
(h) in the case of shares, their nature - normally speculative in nature or of a non-dividend type."

CRA goes on to say having one of these factors would not normally constitute carrying on a business, you would need a number of them to be present for them to consider it to be active business activity and thus not eligible for TFSA. So, for example, having speculative shares, per (h), on its own is not a problem.