Published: March 5, 2020
Last Updated: October 21, 2022
In order to remain tax free, investments in a tax free savings account (TFSA) have to be passive investments rather than an active business. Although the buying and selling of shares are widely held to be investments in the sense that it is a capital gain or loss, a range of factors have been used to assist the courts in determining whether a trader of shares is doing so as a business. In a nutshell, the court will look at whether the TFSA holder shares enough characteristics with a trader in securities:
- Trading volume and holding period: a high volume of transactions combined with relatively short holding periods is an indication of business income;
- Special knowledge of securities: a TFSA holder with specialized knowledge of trading securities on the market or special knowledge of the shares being traded is an indication of business income;
- Financing or margin trading: buying shares on margin or trading on highly leveraged accounts are an indication of business income;
- Investment of time: a significant amount of time spent on researching and trading securities is an indication of business income;
- Nature of the shares being traded: in some cases, the more speculative a share is (eg. penny stocks or options vs. blue chip securities), the more it indicates business income;
- Intention at the time of purchase: although less relevant in a TFSA, the courts will still consider what the intentions were of the TFSA holder when purchasing shares.
None of these factors are determinative, and they are all taken into consideration to arrive at a final conclusion. If the TFSA holder is determined by CRA to have been conducting a business operation inside their TFSA, they will be taxed on the full income. Our top Toronto tax lawyers can assist you if CRA has audited you and issued a tax assessment charging your TFSA with income tax.
Procedurally, the CRA will issue a requirement to the TFSA trustee (typically a bank) to provide documents to CRA. Increasingly, the TFSA trustee will not stop at only providing documents to CRA; the TFSA trustee will also not allow withdrawals from the TFSA by the TFSA holder. This is because if the TFSA holder withdraws his or her entire account, the TSFA trustee is liable for any unpaid taxes. According to the Financial Post, some Canadians who have been audited or reassessed by CRA for allegedly carrying on a business in their TFSAs have settled their disputes with CRA by paying taxes on their TFSA gains as business income in exchange for waiver of additional penalties. Contact one of our Canadian tax lawyers before making any settlement with CRA.
"This article provides information of a general nature only. It is only current at the posting date. It is not updated and it may no longer be current. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in the articles. If you have specific legal questions you should consult a lawyer."