When is a TFSA not Tax-free?

Jul 7, 2017

The Canada Revenue Agency recently confirmed their concern about non-passive investments in TFSAs. When might this be an issue?

The Canada Revenue Agency’s position is that if a TFSA is being used for an investment business the gains will not be tax free. The CRA has indicated that they are reviewing TFSAs as part of their audit and assessment activities. The primary criteria seems to be the amount of gains in the TFSA. If the CRA considers the activity to be a business they will tax the gain as business income. The CRA has already secured significant revenue through these efforts.

The capital gains rate is not available to business income generated in a TFSA. The tax consequences could be significant. It is important to be clear about whether this issue could apply to a client. The Tax Foresight Securities Trading classifier can help with this determination. It applies existing case law on when courts consider investment activity a business. This is then used to predict whether the scenario entered will be a capital gain or business income. If it would generally be a capital gain the tax free status of a TFSA is available.

Factors Considered by the CRA and Tax Foresight:

  • The time the taxpayer spends on securities trading.
  • The frequency of the taxpayer’s security transactions.
  • The nature of the securities, such as whether they are debt or equity.
  • How long the taxpayer held the securities.

Securities Trading Insights:

  • In 60% of cases involving securities trading courts have found the income was from a business.
  • When the taxpayer intended to hold the securities for one year or longer this drops to 37%.
  • When the taxpayer is a novice in the securities market 35% of the cases have a business outcome. This contrasts with 73% in cases with taxpayers experienced in the securities market.
  • In all cases where the gain or loss was a result of short selling the court found business income or a business loss.
  • Each time you run our Securities Trading Classifier, you apply all existing Tax Court of Canada, Federal Court of Appeal, and Supreme Court of Canada cases to your client’s situation.

Want to make sure you are considering all the new securities trading cases when you give your advice? Tax Foresight reflects the newest case law and takes every case into account when providing its prediction.