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TFSA Investing v.s. Trading
October 20, 2021
12:07 pm
TFSA_Newbie
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Dear forum, thanks for your assistance in helping me figure out my new TFSA account.

I only just started investing in my TFSA account as I hopeto save for a down pmt to buy my first home. However after reading online articles and forums I am confused as to how the CRA determines investing versus trading because it seems there is no set trading limits in regards to frequency of trades and the CRA judges investing vs trading on a case by case basis?

I assume everyone using a TFSA wants to grow their assets and given my timeline (am 22) I do lean towards higher growth or riskier investments but these instruments also are volatile. So with stop limits I tend to jump in and out of the same stocks frequently (sometimes three or four times a week). Which is super easy give the new trading platforms. I just have to set my parameters and I let things go the way things go.

However should I be concerned about this? I consider myself an investor as my timeline to use the money is years out but if I trade in and out of volatility would the CRA consider this trading? Or trading for profit? Isnt all trading for profit?

I don't want to get into trouble but with no specific hard trading limits in regards to frequency of trades it makes it hard to understand and sometimes I almost want to hold a stock that is tanking because I am worried about it being added to some frequency number I know nothing of because one bad week or day can wipe out a year of growth.

I think the TFSA is a great tool but the CRA does not seem to care if I lose all my funds and only care if I trade them too often or make too much money??? I really don't understand....and don't want to be afraid to invest.

Thanks for any wisdom or insight you have.

October 20, 2021
1:48 pm
BillieBob
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October 20, 2021
7:04 pm
Loonie
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I think your questions and confusion are quite valid, and that you would benefit from reading the above link.

I do think you are at high risk of being considered a trader and that you should stop what you are doing immediately.

If you feel unsure about this, you really should consult with a professional accountant and/or lawyer. It could cost you a lot more if you don't and, either way, the clarity gained will help you.

October 20, 2021
7:07 pm
Koogie
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You can read through these threads on FWF that deal with the topic as well:

TFSAs and carrying on a business
https://www.financialwisdomforum.org/forum/viewtopic.php?p=539488&hilit=tfsa+frequency#p539488

Would CRA say this is capital gains or business income?
https://www.financialwisdomforum.org/forum/viewtopic.php?t=121641&hilit=tfsa+frequency

CRA vs TFSA Court rulings
https://www.financialwisdomforum.org/forum/viewtopic.php?p=685374&hilit=tfsa+frequency#p685374

TFSA - Would this scenario raise a CRA flag?
https://www.financialwisdomforum.org/forum/viewtopic.php?p=685800&hilit=tfsa+frequency#p685800

I think RedFlagDeals forums has some threads as well. Canadian Money Forum probably does as well if you can deal with the arseholes that post there.

October 20, 2021
7:31 pm
AltaRed
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Koogie's links are good resources. My guess is CRA 'might' tolerate the trading activity you are talking about if you are a rank amateur (no professional accreditation in the financial industry) and most of your income is earned via a day job or similar.

I think that if CRA determines you are "carrying on a business" as a trader, it is going to be up to you to prove that you are not (guilty until proven innocent in tax court). The penalties are steep for wrongly using the TFSA vehicle.

WADR to your game plan, are you sure you are doing any better than just picking a few growth stocks and letting them run? Have you benchmarked your performance against, for example, QQQ or similar?

October 20, 2021
11:02 pm
Loonie
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It might be helpful to try and understand CRA's mindset. I have no access to the brain of CRA, but it seems to me the idea of TFSA was intended to allow people to make long term investments in what are generally seen as reliable stocks that will be boring but steady. It's not meant for something where you are flitting in and out without a strategy that CRA would recognize and that probably other investment professionals would not recognize either.
I don't know if that is helpful, but try to look at your investments the way a fund manager might. Professional fund managers don't make a huge number of trades, even though they are managing ginormous portfolios. This is what is defined as "investing", so it's what you need to also do. Or, make your life easier and just buy the funds; over the long haul, you are almost certain to be better off with some decent funds than with what you are doing now.
The temptation to think you could beat the market just by doing X or Y is strong, but it's where all kinds of people lose money, and so it is not really considered to be "investing". If what you are doing really worked in the long run, the very well paid fund managers would be doing it too, and chaos would reign. I don't think you will ever find them doing what you are doing.

October 20, 2021
11:04 pm
Norman1
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TFSA_Newbie said
… So with stop limits I tend to jump in and out of the same stocks frequently (sometimes three or four times a week). Which is super easy give the new trading platforms. I just have to set my parameters and I let things go the way things go.

That transaction record is clearly the record of a stock dealer/trader and not of a stock investor. No investor changes his/her mind about a stock multiple times a week!

It would be a good idea to learn what investing in stocks actually is. It is not buying at a certain price and then selling when a target price is reached, even when it has just been a few days after the buy.

October 21, 2021
7:20 am
TFSA_Newbie
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Norman1 said

That transaction record is clearly the record of a stock dealer/trader and not of a stock investor. No investor changes his/her mind about a stock multiple times a week!

It would be a good idea to learn what investing in stocks actually is. It is not buying at a certain price and then selling when a target price is reached, even when it has just been a few days after the buy.  

Thanks for the assistance. Am studying to become an engineer and don't really consider stop losses complicated but protecting my position. Maybe I should just become more comfortable with the ups and downs of the market.

October 21, 2021
8:14 am
TFSA_Newbie
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Thank you everyone for your help. It does help even if I don't completely understand.

In engineering we work with real numbers. So I find this process confusing because I can't image someone asking me, "so will this bridge hold N" and I reply with, "it should" or "I think it will" 🙂 Having data and real numbers is crucial so I find the TFSA process somewhat subjective.

I will never touch options, yet the CRA says these are okay in a TFSA. Options (as I understand them) are a hedge or insurance in the speculation of a change in price action, that can multiple your losses or gains. I just prefer using a stop loss to ensure I can get out, but since I want to stay invested I also buy back in typically at a better price. Thus increasing my frequency in trading.

It's so confusing. I just want to play within the rules. The CRA does not care if I lose everything. So why freak me out that I could be too successful?

So many of my friends are now retail investors, flipping meme shares with no commission trades. They trade "way" more than I do but since our accounts are small maybe the CRA will not care? and they are not trading in RRSP accounts (why bother we have no income) they are trading in their TFSA's.

A lot of people have suggested that I invest in ETF's which is a great idea and way safer. Yet I am 22 so if I am going to take on some risk now would be the time plus the CRA has not limited what I can invest in by saying we can only invest in ETF's. Again they say options are ok?

So I either roll the dice and hope I am never flagged. Or pick ETFs and watch my portfolio rise and fall, even though it could crash 20% in one month like March of 2020. Man I sound like an entitled Genz 🙂

I think the TFSA is the best investment option created for someone like myself who wants to buy a property and move forward in life. I am just struggling with the subjective nature of how success/profit is measured. Which would never work in my engineering world. Where we need to know what the rules and numbers are.

Plus whether things are classified as trading or investing the end gain is to make a profit. Something we all should agree on. Otherwise what's the point (unless you only invest in to protect against inflation 🙂 However "profit" is also what defines what is a business...so are we all guilty of making a profit......ugh!!!

My take away is. The CRA does not care if you lose, only that if you do win that they get their cut. Makes sense. As we do need to build/fix a lot of bridges and roads and that takes $$$....but I will still find it impossible not to sell when the market slides more than 1%. Guess we will see what happens.

Or maybe the fact that I am worried is the answer to my original question. Guess I need to buy some polyester pants, a handful of ETF's and hope that the market is up when I want to buy a home 🙂

Thanks for all your help.

October 21, 2021
9:33 am
Norman1
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Whether one is investing or dealing is based on intent, not the resulting profit or loss. It is similar to manslaughter and first-degree murder in criminal law. The victim is equally dead in both. But, the perpetrator's intent determines whether it was manslaughter or pre-meditated murder.

CRA does not pursue unsuccessful traders using their TFSA accounts because there would be no taxes collected on the resulting business losses.

Your friends who flip meme shares are not stock investors. They are actually stock speculators, a kind of trader.

The real world is not as simple as those introductory engineering course exercises. "Will this bridge hold N when it is a day old?" is easily answered objectively. "Will this bridge hold N after it is exposed to the elements for 50 years old?" is not.

If you have the chance, include some courses about chaos theory in your studies. Complex systems like economies, stock markets, and atmosphere are non-linear systems which defy precise predictability. That's why one cannot, for example, predict the exact temperature and weather for New Years Day 2022.

October 21, 2021
10:34 am
hwyc
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The principles engineers would adhere to are clear and equally applicable to your dilemma. sf-smile

… What would engineers do when the "margin to safety" is an unknown?

October 21, 2021
10:45 am
Loonie
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Norman is right.
Although I fully appreciate your criticisms of CRA's apparent arbitrariness, it's them that sets the rules. They don't care what your perspective is or how irrational they may seem to us. While I fully appreciate where you are coming from, you really would be better off keeping your hands in your pockets and getting ETFs which you can rebalance periodically. Don't let yourself get carried away by your friends' opinions. They are young and inexperienced just like you, and may be playing with fire unawares.

Chaos theory etc is well beyond my knowledge, but I would suggest you read up on rebalancing in investing. This will give you a mechanism to have some control but not so much that you will shoot yourself in the foot, your current path; and it will be based on the reality that this is the way that most people succeed in investing: buy, hold, rebalance; repeat. If you want, I can look up a book or two that I have read in the past that would give you some measurable criteria by which to do this. You can also buy ETFs that will do the rebalancing themselves, but, since you are the kind of guy who likes to control the situation, you would probably be better off holding several and doing the rebalancing yourself. Just don't get carried away by holding too many of them. I would say you don't need more than 3. The more money you accumulate, the more you might consider adding.
If you want to play around with other legitimate investments, do it outside of your TFSA, where you can deduct any losses.

October 21, 2021
12:34 pm
COIN
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We have a joke in my social circle.
If you are making gains, CRA will say trading.
If you are making losses, CRA will say capital.
Edit: Just realized the member is talking solely about a TFSA so the above might not apply.

Here's a bit of free advice. Take it for what it's worth since it's free.
There are bold traders and there are old traders but there are no old bold traders.

Question: Whatever happened to the "capital gains election"? Still around? (Might not apply to a TFSA.)

October 21, 2021
12:46 pm
Bill
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Perhaps it's an investing vs trading issue, I think of it as an investing vs business activity issue, i.e. the TFSA prohibition is on conducting a "business" (of investing, or trading, or anything for that matter) within a TFSA.

And whether or not you are acting in a business-like manner is not determined arbitrarily by CRA, along with the ITA definition of "business" there is a body of jurisprudence that guides CRA in its determination of this issue. CRA archived IT Bulletin 459 (might be worth reading if you're concerned) had guidelines on this, it starts with "It is a general principle that when a person HABITUALLY does a thing that is capable of producing a profit, then he is carrying on a trade or business....."). Along with "habitually" I have also seen the words "regularly" or "continuously" used to determine if an activity is a business or not, so arguing about the dictionary definition of those three words is often the crux of the matter in any given situation. That's why there's no magic number of trades, or dollar amounts, etc, that can be given, it all depends.

October 21, 2021
1:14 pm
AltaRed
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Agreed the decision making process is based on whether the evidence supports the activity being a "business" or not.

October 21, 2021
2:07 pm
Loonie
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You guys are probably right, but you have probably also confused this inquirer even further. From his perspective, if you are habitually making money, then you are doing exactly what you should be doing with your money. And, really, who can argue with that, rationally? Isn't that everyone's ideal goal? That's why Bernie Madoff's extensive wealthy client list never complained, because they were ALWAYS making money, according to what he reported to them, even though it wasn't true. They were thrilled, and the SEC didn't see anything wrong either.
The point is that CRA has its own views and that those prevail, no matter how ridiculous they may seem to TFSA Newbie (and me for that matter). That's what he needs to wrap his head around in order to not run afoul of CRA.

October 21, 2021
2:35 pm
Norman1
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Loonie said
…, but you have probably also confused this inquirer even further. From his perspective, if you are habitually making money, then you are doing exactly what you should be doing with your money. And, really, who can argue with that, rationally? …

That's not quite what IT-459 says. It not habitually making money. It is habitually doing something that can produce a profit, like buying and selling produce or buying and selling stock:

1. It is a general principle that when a person habitually does a thing that is capable of producing a profit, then he is carrying on a trade or business notwithstanding that these activities may be quite separate and apart from his ordinary occupation. An example is that of a dentist who habitually buys and sells real estate.

Whether or not a profit is actually made is not relevant.

Of course, CRA isn't going to spend effort re-assessing if there ends up being no profit as CRA won't collect any additional taxes for the effort spent.

October 21, 2021
3:00 pm
Norman1
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A stock investor intends to participate in the long term (5+ years) appreciation in the value of a successful business and any dividends such a business will pay to its investors. The short term fluctuations in the market price of the business are not important.

When the market price drops with no material change to the business, then there is a temptation for the investor to buy more, not sell. That's because the long term value of the business did not change. It is actually a welcome event to the investor when the same thing that cost $30 last month can now be purchased for $25!

In contrast, it is an unwelcome development for a stock dealer when the same thing that was bought for $30 last month can now be purchased elsewhere for $25.

Standing stop loss orders, especially ones that can trigger weekly, make no sense to an investor who is trying to accumulate a portfolio of investments.

October 21, 2021
3:29 pm
Loonie
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Yes, I see all that, but I don't see anywhere on the TFSA forms that a person has to agree with this definition of investing, understand it or even be informed about it. People have their own ideas. That's where the misunderstanding of CRA can arise. The difference between a "profit" and a "return", "yield", "gain", or whatever you want to call it is more than many people are aware of or understand. To them, it all boils down to the same thing.
Ironically, it is the person who is NOT running a business and who is NOT familiar with the technical terms who could get done in by them simply by trying to minimize losses.

October 21, 2021
5:46 pm
Bill
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"The point is that CRA has its own views and that those prevail, no matter how ridiculous they may seem...That's what he needs to wrap his head around....."

A popular urban myth, and bad advice. In fact, both the Tax Court and the Federal Court of Appeal history of decisions are what guide CRA precisely because CRA knows it is not the final authority, i.e. the interpretation of tax laws, like all laws, are ultimately determined by the courts. Judges do not take kindly to CRA ignoring previous decisions and people showing up for issues that have previously already been decided in the courts, so in fact CRA is very careful in what it does.

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