It’s bad enough that many Canadians don’t understand the rules surrounding TFSAs. Now the Canada Revenue Agency wants to prohibit how much you can make from them. Where does it end?
It’s bad enough that many Canadians don’t understand the rules surrounding TFSAs. Now the Canada Revenue Agency wants to prohibit how much you can make from them. Where does it end?
The problem here appears to be that age-old litmus test the CRA applies when determining whether you’re operating a business or not. Regardless of whether your investments are held within a taxable or non-taxable account, securities sold for a profit while carrying on a business can in certain instances be considered income by the CRA rather than the more preferential capital gains treatment.
The Financial Post suggested in a recent article that taxpayers are reaching settlements with the CRA; those in question are paying taxes on the gains within the TFSA (no penalties assessed) despite the fact no case law exists to support the CRAs position.
According to Tim Laceby, Senior Tax Manager at Kreston GTA LLP, “One of the prohibitions on a TFSA that the CRA has not done a good job of educating the public on is that a TFSA cannot carry on a business. The active trading of marketable securities in a TFSA could be considered to be carrying on a business… Over the years the courts have come up with a list of factors to be considered in the determination of whether or not someone is or is not carrying on a business… Sometimes it can be difficult to determine whether or not someone is carrying on a business. A couple of ways to look at the rules are:
A) If you buy securities in your TFSA, hold them for a significant period of time and during that time you earn income from the securities, you are less likely to be considered carrying on a business.
B) If when you buy securities, you treat them like inventory, and are buying and selling them frequently, you are more likely to be considered carrying on a business.”
So, if you’re hyper-trading the securities within your TFSA, Laceby reasons that the CRA in certain instances could be compelled to consider those investments inventory rather than simply positions held within a portfolio.
Should you be concerned?
“It depends,” says Laceby. “Everyone’s situation is slightly different. If you are concerned because you have had significant gains in your TFSA, you may benefit from contacting your tax advisor.”
Go figure. The federal government takes a simple savings mechanism and turns it into a taxation hornet’s nest.
Tim Clarke, quoted several times in the Financial Post’s story, and a lawyer with Calgary-based Moodys Gartner Tax Law LLP, is stepping up to challenge the CRAs position on this issue.
He puts the situation in crystal-clear perspective stating, “In my view, what we need is a black line test, if you put a qualified investment into a TFSA, as long as it’s within the categories of qualified investment, it shouldn’t matter how you earn or lose money. The income should not be taxable and the losses not deducted.”
If only the CRA could think so rationally.
The problem here appears to be that age-old litmus test the CRA applies when determining whether you’re operating a business or not. Regardless of whether your investments are held within a taxable or non-taxable account, securities sold for a profit while carrying on a business can in certain instances be considered income by the CRA rather than the more preferential capital gains treatment.
The Financial Post suggested in a recent article that taxpayers are reaching settlements with the CRA; those in question are paying taxes on the gains within the TFSA (no penalties assessed) despite the fact no case law exists to support the CRAs position.
According to Tim Laceby, Senior Tax Manager at Kreston GTA LLP, “One of the prohibitions on a TFSA that the CRA has not done a good job of educating the public on is that a TFSA cannot carry on a business. The active trading of marketable securities in a TFSA could be considered to be carrying on a business… Over the years the courts have come up with a list of factors to be considered in the determination of whether or not someone is or is not carrying on a business… Sometimes it can be difficult to determine whether or not someone is carrying on a business. A couple of ways to look at the rules are:
A) If you buy securities in your TFSA, hold them for a significant period of time and during that time you earn income from the securities, you are less likely to be considered carrying on a business.
B) If when you buy securities, you treat them like inventory, and are buying and selling them frequently, you are more likely to be considered carrying on a business.”
So, if you’re hyper-trading the securities within your TFSA, Laceby reasons that the CRA in certain instances could be compelled to consider those investments inventory rather than simply positions held within a portfolio.
Should you be concerned?
“It depends,” says Laceby. “Everyone’s situation is slightly different. If you are concerned because you have had significant gains in your TFSA, you may benefit from contacting your tax advisor.”
Go figure. The federal government takes a simple savings mechanism and turns it into a taxation hornet’s nest.
Tim Clarke, quoted several times in the Financial Post’s story, and a lawyer with Calgary-based Moodys Gartner Tax Law LLP, is stepping up to challenge the CRAs position on this issue.
He puts the situation in crystal-clear perspective stating, “In my view, what we need is a black line test, if you put a qualified investment into a TFSA, as long as it’s within the categories of qualified investment, it shouldn’t matter how you earn or lose money. The income should not be taxable and the losses not deducted.”
If only the CRA could think so rationally.
