TFSAs and carrying on a business

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Peculiar_Investor
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TFSAs and carrying on a business

Post by Peculiar_Investor »

IIRC there have been occasional discussions about trading frequency and strategies within a TFSA. For those who are inclined to be more active investors, you might want to spend some time reading (tip of the hat to Garry Marr) Canadians with too many wins in their TFSA are being targetted by CRA | Financial Post
Garry Marr wrote:The CRA is also hitting investors with audits if they trade too frequently for the agency’s comfort. The CRA has argued that investors who use their TFSAs for frequent trading and earn large gains are effectively running a trading business, and should be taxed on income.

The sudden growth in CRA scrutiny has triggered concern from the Investment Industry Association of Canada, which recently complained of “insufficient guidelines” for TFSA investors to determine whether they’ve run afoul of tax rules, in a letter to the Finance Department and the director general of the Canada Revenue Agency (CRA).
Those interested might want to read the original source, IIAC Letter to Finance and CRA re “Carrying on a Business” and Borrowing Within TFSAs (PDF) which covers a series of letters on the matter.

I'm not an accountant, nor a frequent trader, but from my read of these articles/letters, the underlying issue that might be of interest to FWF'ers is (I've added the link to IT-479R):
IIAC wrote:Since IT-479R, Transactions in Securities, was issued in 1984, there have been significant changes in the financial marketplace including major drops in interest rates, advances in technology allowing for self-service options, and greater taxpayer financial literacy, which has meant that more people buy and sell more frequently from a wider range of investments in the capital markets than before. We recognize that any CRA decision on whether or not a business has been carried on will be based on the facts of a particular taxpayer situation, however, is there information available currently for Canadian taxpayers that would speak to the risks, from a tax perspective, that frequent trading, investment in non-dividend-paying securities, etc. could lead to? We feel a need for clients to have access to plain-language guidance on what is being considered by the CRA to be carrying on business.
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Re: TFSAs and carrying on a business

Post by queerasmoi »

The mention of debit balances / borrowing within a TFSA triggering a deregistration is an interesting issue. I had one case at Questrade where I bought 2 ETF shares with distribution cash in my TFSA, no commission, and it ended up filling one cent higher than expected + 2¢ ECN fees. The result was a debit balance of -$0.02 which I did not immediately notice. This lasted one week until I made a scheduled contribution.

So theoretically if they had to audit my account, that could have triggered a complete deregistration on account of 2 cents. Which would be rather annoying.
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Re: TFSAs and carrying on a business

Post by DmDave »

What if I borrow from my personal LOC to contribute to the TFSA, is that now consider a margin account? CRA needs to have clearer guidelines, instead of going on a witch hunt.

FYI I don't deduct the interest from my income.
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Re: TFSAs and carrying on a business

Post by queerasmoi »

DmDave wrote:What if I borrow from my personal LOC to contribute to the TFSA, is that now consider a margin account? CRA needs to have clearer guidelines, instead of going on a witch hunt.

FYI I don't deduct the interest from my income.
No you're welcome to borrow from outside and contribute to TFSA. You can also borrow *against* the TFSA as collateral to invest outside. You just can't run a negative balance inside the TFSA.
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Re: TFSAs and carrying on a business

Post by IdOp »

I hope CRA will be consistent and ferret out any people who ran their TFSAs into the ground by frequent trading, and force them to claim the losses on income account.
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Re: TFSAs and carrying on a business

Post by Jo Anne »

IdOp wrote:I hope CRA will be consistent and ferret out any people who ran their TFSAs into the ground by frequent trading, and force them to claim the losses on income account.
What does CRA do about frequent traders who use their RRSP accounts? It would also be inconsistent to let that slide while they are targeting TFSA accounts.

Maybe I shouldn't have mentioned this.
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Re: TFSAs and carrying on a business

Post by brucecohen »

Jo Anne wrote: What does CRA do about frequent traders who use their RRSP accounts? It would also be inconsistent to let that slide while they are targeting TFSA accounts.
Not necessarily. The RRSP gains will get taxed on withdrawal -- fully taxed as income. The TFSA gains won't.
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Re: TFSAs and carrying on a business

Post by IdOp »

The TFSA starts as after-tax money. So the CRA could just take those taxes they've collected and trade them rapidly to get big gains. I'm being facetious in that sentence. It just seems to me that frequent trading overall is a loser's game due to costs, and CRA is targeting the "lucky" ones selectively if they do this. Is this really a tax free plan or isn't it? (Rhetorical question)
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Re: TFSAs and carrying on a business

Post by patriot1 »

brucecohen wrote:The RRSP gains will get taxed on withdrawal -- fully taxed as income.
The RRSP holder gets to decide when to take money out of the RRSP and thus what tax rate to pay - might even be zero, and also when to deduct RRSP contributions. Think of a scenario where someone is carrying on active trading in both cash and RRSP accounts and sees their taxable income fluctuate substantially. In this respect there is more room for "gaming" than the TFSA, which is after-tax income.

My own view - a tax shelter is a tax shelter. It's one thing to designate cash account proceeds as income versus cap gains, another to de facto deregister the shelter.
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Re: TFSAs and carrying on a business

Post by max88 »

I can't believe the conservative gov is trying to do "some" thing to the [censored] TFSA, instead of scrapping it all together. Once you start [censored] "tweaking" the tax base, it always have undesirable effects. The best way is keep it [censored] simple stupid.

The same for RRSP. You save tax in working years, pay more on withdrawal years.
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Re: TFSAs and carrying on a business

Post by AltaRed »

max88 wrote:I can't believe the conservative gov is trying to do "some" thing to the [censored] TFSA, instead of scrapping it all together. Once you start [censored] "tweaking" the tax base, it always have undesirable effects. The best way is keep it [censored] simple stupid.
I agree that tweaking the tax base spawns unintended consequences, but it is not unique to any one government. Let's keep politics out of this thread. The problem is how to keep it simple stupid. If the ITA was only 2 pages long, there would be a host of tax accountants and lawyers still looking for an edge. The only way I know to solve that problem is to impose extremely harsh penalties for anyone looking for and pushing on back doors.
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Re: TFSAs and carrying on a business

Post by max88 »

Anything likes this is political in nature. Maybe I can change my tone to problem solving...

The best solution is (the conservative) admit stupidity, scrap TFSA, and beg for forgiveness. I will vote them again.

Since that (admitting stupidity) is not going to happen, the 2nd best change to simplify it. I will vote them again.

- Put a life time contribution limit.
- Contribution and withdrawal in cash only.
- Qualified holdings include CA$ cash/HISA/MMF/GIC, CA publicly traded stocks on TSX (no TSX-V). No Cayman Island bonds, no US stocks, no nothing else.

Simple stupid.
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Re: TFSAs and carrying on a business

Post by queerasmoi »

max88 wrote: - Contribution and withdrawal in cash only.
Honestly all that really does is make more commission money for the brokerages. During the early TFSA years I always made my contributions in-kind, and since Credential was my broker at the time, trading to accomplish the same end result would have been $19.95x2 per ETF. And they already sacked swap transactions to prevent abuse anyway.

Maybe the CRA could instruct brokers to value all in-kind TFSA contributions at the daily high (to trigger higher capital gains and consume more contribution room), and to value all in-kind TFSA withdrawals at the daily low (so you get a low ACB & get less contribution room back). This would discourage in-kind transactions that were designed to game the system, and disfavour in-kind transactions of more volatile securities, while still providing the option for investors who only need to make these transactions every once in a while.
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Re: TFSAs and carrying on a business

Post by Peculiar_Investor »

As the OP, I created this as a separate topic specifically to discuss CRA's interpretation of IT-479R and how it is (or isn't) being applied to what most of us believe to be a tax sheltered investment vehicle.

There are a variety of other TFSA related topics on FWF that discuss whether TFSAs are good or bad tax policy, what the future holds for TFSAs, etc. Can we please keep posts unrelated to the original, specific, topic to the other TFSA topics. Thank you in advance.
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Re: TFSAs and carrying on a business

Post by Peculiar_Investor »

The topic of aggressively building up the value of TFSAs periodically comes up on FWF. Once again a reminder that CRA thinks that TFSAs with holding several times greater than the contribution limit are contrary to the spirit of the TFSA. From Audits on large TFSAs ramped up | Investment Executive
Taxpayers who hold TFSAs with large asset balances may fall under the scrutiny of the Canada Revenue Agency (CRA) as part of its ongoing audit program for these accounts. A key concern for the tax agency is whether a taxpayer is carrying on the business of day trading, a determination that would lead the CRA to tax any income earned in the TFSA as business income.

"Although the majority of those who use the TFSA as an investment vehicle do so in accordance with the law, some may use these accounts contrary to the spirit of the legislation in order to reduce the amount of taxes they owe significantly," says Zoltan Csepregi, senior media relations advisor with the CRA.
  • The CRA has not specified an asset level above which it will flag a TFSA for review. Rather, the agency reviews TFSAs "with holdings several times greater than the contribution limit," Csepregi says.
Earlier this year, the CRA announced that it had identified $75 million in taxes owing as a result of its TFSA audit program since 2011. The majority of this amount involves taxpayers who used prohibited investments, swap transactions and other "abusive" manoeuvers to build up balances of more than $1 million in their TFSAs.
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Re: TFSAs and carrying on a business

Post by deaddog »

The sad thing is that there are no specific rules, only vague guidelines.
CRA definition of carrying on a business is an activity or undertaking engaged in for profit.
Anyone sticking their money in a TFSA hoping for a loss? :?

The TFSA has many advantages as a trading vehicle.

Firstly of course is that it is tax free. You can trade in an out of a stock without taking a tax hit on each trade.

You are not constrained by the superficial loss rule. You can buy back a stock you have sold for a loss if it turns around.

No annual paperwork for the CRA (Unless you get audited :( )

Hopefully I'm flying under their radar. I'm not a professional, I'm not day trading, I'm not trading speculative (penny) stocks and although I have more than doubled my contributions, I haven't had what would be considered spectacular results. But without specific rules I suppose someday they might be knocking on my door.
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Re: TFSAs and carrying on a business

Post by AltaRed »

I think you are safe. Doubling is not the same as 'several times' contribution limits. One can certainly undestand that balances of $1 million WOULD most likely be 'business activity' absent someone being better than any baseball player in history having hit home runs.
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Re: TFSAs and carrying on a business

Post by IdOp »

I hope the CRA will be consistent and start going after people with RSPs, RRIFs and LIRAs who trade them into the ground. After all, think of all the tax dollars CRA is missing out on because of this failed business activity. If those folks had used reasonably-spirited investment techniques they would have been withdrawing a lot more money from those accounts, money that CRA would have taxed. :roll:
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Re: TFSAs and carrying on a business

Post by OnlyMyOpinion »

deaddog wrote: 21 Oct 2017 12:53 The sad thing is that there are no specific rules, only vague guidelines... without specific rules I suppose someday they might be knocking on my door.
In my experience dealing with government staff working under regulations, I came to realize that having some ambiguity can allow staff to use discretion when circumstances warrant. Some will find this probematic not having exhaustive regulations/rules, but my experience when dealing with sensible staff on sensible issues was that it allowed them to 'side with us' where they otherwise would not have been able to.
It is a two-edged sword however, obviously the risk exists that staff or regulators decide to take a hardline interpretation that negatively affects you or your business.
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Re: TFSAs and carrying on a business

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IdOp wrote: 21 Oct 2017 14:07 I hope the CRA will be consistent and start going after people with RSPs, RRIFs and LIRAs who trade them into the ground.
I think there is a significant difference between the tax approach/consequences of the TFSA vs other registered account types such as RRSPs. Gains within TFSAs never get tax treatment, whereas gains within RRSPs (and the like) eventually are subject to tax considerations upon withdrawal.
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Re: TFSAs and carrying on a business

Post by Jo Anne »

Peculiar_Investor wrote: 21 Oct 2017 14:50
IdOp wrote: 21 Oct 2017 14:07 I hope the CRA will be consistent and start going after people with RSPs, RRIFs and LIRAs who trade them into the ground.
I think there is a significant difference between the tax approach/consequences of the TFSA vs other registered account types such as RRSPs. Gains within TFSAs never get tax treatment, whereas gains within RRSPs (and the like) eventually are subject to tax considerations upon withdrawal.
I think what IdOp meant was people who took a $500,000 RRSP account and managed to turn it into a $10,000 account. They are screwing the government out of the tax on $490,000.
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Re: TFSAs and carrying on a business

Post by longinvest »

Jo Anne wrote: 21 Oct 2017 15:45
Peculiar_Investor wrote: 21 Oct 2017 14:50
IdOp wrote: 21 Oct 2017 14:07 I hope the CRA will be consistent and start going after people with RSPs, RRIFs and LIRAs who trade them into the ground.
I think there is a significant difference between the tax approach/consequences of the TFSA vs other registered account types such as RRSPs. Gains within TFSAs never get tax treatment, whereas gains within RRSPs (and the like) eventually are subject to tax considerations upon withdrawal.
I think what IdOp meant was people who took a $500,000 RRSP account and managed to turn it into a $10,000 account. They are screwing the government out of the tax on $490,000.
:rofl:
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Re: TFSAs and carrying on a business

Post by IdOp »

Jo Anne wrote: 21 Oct 2017 15:45I think what IdOp meant was people who took a $500,000 RRSP account and managed to turn it into a $10,000 account. They are screwing the government out of the tax on $490,000.
Yes, exactly what I meant, thanks.

I've started to wonder if it wouldn't be better to have just a single kind of tax-sheltered account, one with 50% tax inclusion on the way in, and 50% on the way out. That way CRA will get something no matter what happens, and maybe please they can stop this monkey business.
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Re: TFSAs and carrying on a business

Post by Peculiar_Investor »

IdOp wrote: 21 Oct 2017 16:38
Jo Anne wrote: 21 Oct 2017 15:45I think what IdOp meant was people who took a $500,000 RRSP account and managed to turn it into a $10,000 account. They are screwing the government out of the tax on $490,000.
Yes, exactly what I meant, thanks.
:oops:

Perhaps the government should provide links to FWF so we can educate them. :lol:
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Re: TFSAs and carrying on a business

Post by IdOp »

Peculiar_Investor wrote: 21 Oct 2017 18:06Perhaps the government should provide links to FWF so we can educate them. :lol:
Lol, ... but then we'd have nothing to complain about anymore. ;)
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