What is excessive trading and other tfsa risk questions re: taxation | Page 2 | Tax Free Savings Accounts | Discussion forum

Norman1 said
It has nothing to do with "too much money". The issue is the intentions involved in making that money.

If someone turned $60,000 in their TFSA into $1.2 million in less than a year, that person better not have a history of buying stocks and holding them for no more than a year. That kind of transaction history is indicative of someone dealing or trading in stocks and not investing in them.

Someone with that kind of history should start looking for a good tax lawyer!

In contrast, someone who signed with commission-free Wealthsimple Trade and has been buying one share of an S&P 500 ETF each week to build a portfolio has nothing to worry about. 52 buys a year and zero sells don't suggest the person is dealing or trading in stocks.  

I respectfully disagree.
TFSA deposit $60,000. TFSA withdrawal $1.2 million anytime is perfectly fine, if you accumulated that amount legally inside that TFSA via buying, holding or trading. And your TFSA room for the next year will be $1.2 million + $6000.

The amount isn't really the critical issue, aside from the fact that it might be the thing that catches CRA's eye.

Buying Tesla shares and making $1.2M on them is not at all akin to regularly and frequently buying and selling various securities and making $1.2M. The TFSA rules say you can't operate a business (which includes "adventure or concern in the nature of trade", look up the term if you need) within a TFSA, and frequent activity within the TFSA is an indicator that might (might!) be going on.

Regarding other countries, a tax system that has very different tax treatments for something held for a day less than 3 years vs something held for a couple of days longer sounds kind of weird to me, arbitrary really, and would just encourage its own varieties of manipulations to get around such black and white rules. Canada's legal system, based on English common law (outside Quebec), is based on interpretation and precedent - messier for sure but to me a more democratic, living, evolving system as society constantly evolves.

Loonie said
I don't think the Tesla example contravenes any existing rules for TFSAs. The purchase itself is legitimate; nobody has argued against that. When you buy, you really don't know if the investment is going to succeed or fail or by how much. You are not in control of how much it may increase. You are only in control of when you sell it.
I would have considered it a highly speculative investment. But, as someone pointed out, there is no law against that as long as it's on the stock market. With a spectacular rise like that, it would be prudent to take some profits. Who could argue against that?

If I were the CRA, I wouldn't go after this person. But if I were the government, I'd be keeping stats on how much individuals held in their TFSAs and how much contribution room they had. Based on that information, I'd be considering capping the amount that could be held tax free or in recontribution room. This would not be relevant to RSPs because in that case, the more you make, the more the government makes.  

I think the choice of names reflects the CRA's intention. RRSP = retirement savings, while TFSA = tax free savings. One is ultimately taxable, the other one is not. Making 20x on any investment within a relatively short period of time is speculation and not savings purpose, regardless of which account it is in.
We can interpret all we want, but if CRA decides to make a fuss about your outsize return in a "savings" account, you are in trouble. It is easier to fight the government than the CRA in my mind. Just like you dont want to mess with customs at the airport. Who has more to lose in the end....

Winnie, it's true, there is a broad range of investments that are ok.

But there is more to the rules. What we've been talking about is that, i.e. you can't be operating an investment business (including an adventure or concern in the nature of trade) within your TFSA. Even using acceptable investments.

CRA has not given a size threshold for their TFSA audits. People who have received CRA queries about their TFSA's suspect CRA's threshold is in the $250,000 to $500,000 range.

That threshold is not evidence of guilt. It's just a point where the taxpayer is flagged for further investigation.

It is not an issue of whether the stock is a qualified investment, non-qualified investment, or prohibited investment. It is a question of the TFSA owner's intent for the stock.

June 2017 Financial Post article Stop using your TFSA to frequently trade stocks… highlights what the issue is:

The judge quoted prior jurisprudence which stated that “All of these cases turn on their own facts and illustrate the importance of the factual underpinning that supports a finding that a person has crossed the line from investing to trading.”

Or, as tax law professor Vern Krishna wrote in his monumental tome on tax principles, “Was the taxpayer intending to trade (do business) or invest (hold property)?”
…

Maybe it's clearer when one sees the Income Tax Act wording:
"No tax is payable under this Part by a trust that is governed by a TFSA on its taxable income for a taxation year, except that, if at any time in the taxation year, it carries on one or more businesses or holds one or more properties that are non-qualified investments".

So, with regard to the first exception (before the "or"), then the question becomes what constitutes carrying on a business, and that's where the grey areas arise.

The canada website page re TFSAs has info regarding what are non-qualified investments, it really doesn't have much if any info re the other exception, the carrying on of a business part.

Norman1 said
An "adventure in the nature of trade" outside of a TFSA is still an adventure. CRA will reassess and tax the gains as income instead of capital gains.

It has nothing to do with "too much money". The issue is the intentions involved in making that money.

True.

If someone turned $60,000 in their TFSA into $1.2 million in less than a year, that person better not have a history of buying stocks and holding them for no more than a year. That kind of transaction history is indicative of someone dealing or trading in stocks and not investing in them.

Someone with that kind of history should start looking for a good tax lawyer!

That's true, yes, though if you're saying one has to hold an indicative investment for more than a year, I'm not sure I'd agree with that. One could have a more actively managed portfolio and higher portfolio turnover than others, but that doesn't mean they're investing for business purposes. Buying and selling two or three stocks in less than a year, provided they're not highly speculative stocks (i.e., penny stocks), could still be deemed to be legitimate. For example, one person buys Laurentian Bank at the bottom of its historical 52-week average pricing range, then sells it at the midpoint or near the top of that same average pricing range 9 months later then reinvests the proceeds in another blue chip stock that is technically and/or fundamentally 'cheap'. Someone buying and selling penny stocks like Hut 8 Mining, Mogo Technology, and VersaBank in less than a year may have a more difficult case, though, no?

In contrast, someone who signed with commission-free Wealthsimple Trade and has been buying one share of an S&P 500 ETF each week to build a portfolio has nothing to worry about. 52 buys a year and zero sells don't suggest the person is dealing or trading in stocks.  

This is likely very true, I would agree with this.

Norman1 said
We now have a tax court ruling:

Globe & Mail: Court rules income earned from day trading in TFSA is taxable

Justice David Shapiro of the Tax Court of Canada ruled that the investor [Fareed Ahamed] was carrying on a business inside his TFSA, which had swelled from $15,000 to more than $617,000 over a three-year period. …

  

The full ruling can be found here, if anyone's interested in that sort of thing:

https://www.canlii.org/en/ca/tcc/doc/2023/2023tcc17/2023tcc17.html

Interesting that the case was brought by Canadian Western Trust Company and Fareed Ahamed.

I guess that makes sense, though, since they're appealing an administrative judgment by the Canada Revenue Agency, not the CRA seeking a determination of a requirement to pay a certain amount.

Cheers,
Doug

The simple answer is one cannot carry on a business within a TFSA. If that same effort had been conducted in a regular cash account, it would have been considered business income as well, not cap gains/losses.

Bill said
The 7 elements to be considered re carrying on a business are in paragraph 23 of the case. Note none of them refer to size of amounts involved, i.e. going from $15K to $600K is not an issue, other than that it probably triggers a red flag on CRA's computer for them to take a closer look at what's going on in the account.  

"in the case of shares, whether they are speculative in nature or dividend-paying."

To me, just because its speculative does NOT make it a business. If anything its more for "capital gain" purposes and ntg else.
But then CRA is the god most of the time, someone not to mess around with...