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TFSA Investing v.s. Trading
October 25, 2021
11:41 am
Loonie
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I do think Bill is right that CRA strategy is more to intimidate than to pursue as they don't have the resources to look into everything. But this doesn't mean you are safe from their scrutiny at all since we don't know what is programmed into their computers.
I know someone who received what I can only call a letter of intimidation from CRA once, advising him to review his business expenses, but not asking him to send them any receipts or other documents. He felt his expenses were all justified and so he did nothing as CRA required nothing. I don't know what happened int the end.
One thing I am sure of is that nobody should rely on opinions expressed here in the absence of solid documentation. If you want advice on your situation an important matter, consult a professional - as I said at the beginning of this thread.

October 25, 2021
11:48 am
Norman1
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Bill said
There you go, all sorts of opinions! I personally don't see using stop-losses once a week, on its own, enough to be operating a business but Judge Norman1 might rule against you.…

That's because you didn't consider the entire situation like a Tax Court judge would to calculate the taxpayer's intent. sf-laugh

It does look like they were principle residences and gains made from selling them should be tax free as the taxpayer lived in each and did not live anywhere else during the time. Never mind the time period was six years, that seven houses were involved, or that each house was sold shortly after the renovations were completed.

Tax Court judges are used to sifting through malarkey and finding taxpayer's actual intent.

October 25, 2021
2:15 pm
savemoresaveoften
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TFSA_Newbie said

Person 1
Stock ABC is $10.00 , they own 10 shares and it pulls back 10% with a market value now of $9.00. However at the end of the month the stock rallies and closes at $9.50. They have lost $5.00

Person 2
Uses a stop loss of 1% and closes their position at $9.90 losing $1.00. Since they cannot time the market they repurchase 10 shares back at $9.40 and at the end of the month make $1.

Now overall they have Made $1, lost $1, have 10 shares at $9.50, PLUS they still have their $5 by using a stop loss ($99 cash - buying 10 shares at $9,40). Hence they still have $100.00 at the end of the month and the other person $95.00

Now the only reason they cannot due this is b/c they are afraid it will increase their frequency of trading? So, they should take a 5% loss to comply with the CRA???

If person2 is doing that frequently and as a result amass a big TFSA balance, its pretty clear the person is trading / managing an active business. Do you think any tax court judge will side with that person over CRA ??

On the other hand, if someone put their money into Apple, Netflix etc 10 years ago, never touched it and now have a XXXX% return, it is easy to convince a tax court judge its an investment that turns out well, congratulations. The amount of gain becomes irrelevant.

The younger generation is simply using a TFSA account to avoid capital gain tax. There is no question about that. It is really if CRA goes after those very successful accounts or not. Just like when someone is speeding, some gets caught and some dont.

October 25, 2021
4:23 pm
Loonie
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I'm just wondering if it's really possible to get ahead of longer term investing by the stop-and-go method with a 1% stop loss. It seems to run contrary to what we've always been told about investing.
Does anyone have any data on this?
Is the main problem the repeated capital gains? But, if so,how could it ever be a successful business and why would anyone consider it one?
If it doesn't really get you any or much further ahead, then there is no need to take the risk of offending the tax man.

And on the matter of running a business, how does it prove you are running a business if you simply plug in your stop loss and purchase criteria and let it run by itself basically? I don't do this kind of investing, but would I be correct in assuming the buys and sells would automatically execute if you set up all the necessary parameters?

October 25, 2021
4:29 pm
Bill
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True, Norman1, but not completely convinced. Some of the conditions you put on investors in post 36 are debateable, e.g. "..... the stock can't be an investment if one is not sure of it retaining its value....". Well that's not true, most of us investors aren't ever 100% sure our stocks are all going to retain their value, even that they couldn't go to zero, but that doesn't in any way jeopardize our status as investors. Putting a stop-loss that I might utilize a couple of times a year to re-enter the position later would not mean I'm running a trading business, in my view, frequency and time devoted to the activity needs to be considered too.

And things change. With people doing their own trading online, with almost zero cost to do so, not at all like in the old days when exchanging shares was much more cumbersome, I bet way more trades/transactions are executed per person in our lives these days compared to 50 years ago. Due to tech change it's normal to do 1000 things in the time it used to take to do 1, so we do. Online platforms & phones allow us way more easy options than people ever had before (stop-limits are just one of dozens in investing) that we can do in a microsecond. The intent of investing and trading is the same, to make money, so it might not be a bad idea for some young folks to challenge the old notions of what is a normal level of activity, of what and how much you can and can't do to be considered an investor or trader. Spending your day day-trading is clear, but is swiping your phone a few times every few weeks really operating a trading business?

October 25, 2021
6:17 pm
AltaRed
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Bill said
The intent of investing and trading is the same, to make money, so it might not be a bad idea for some young folks to challenge the old notions of what is a normal level of activity, of what and how much you can and can't do to be considered an investor or trader. Spending your day day-trading is clear, but is swiping your phone a few times every few weeks really operating a trading business?  

Trading itself doesn't make it a business. The question is to what degree trading activity takes up a person's day and what else the individual does to earn an income. If someone spends 5 hours a day trading and doesn't have other meaningful sources of income, it's likely to be considered a business.

Up thread, someone mentioned 1% stop loss presumably for illustrative purposes only. I've never heard of a stop loss set that tight. A lot of stocks move that much in a day. One would potentially be stopped out more than once a week with such tight parameters. Investors are more likely to set a 10% trailing stop in comparison. One still has to make the decision as to when to get back in, if that was the intent.

October 25, 2021
6:57 pm
Loonie
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TFSA_Newbie (OP) was quoted as citing a 1% stop-loss scenario in #43 above. I had the impression this was his habit as he also said he trades several times a week and believes he is protecting himself by not allowing much in the way of losses. While he may not use 1% as his standard, it's also unlikely he lets it go anywhere near 10%. I agree it seems like an unconventionally small percentage. But that is partly why I raised the question about profitability.

Even including the minute or two required to decide when to get back in, it seems to me this is not a very time-consuming undertaking. It sounds like he has focused on stocks that he thinks will do well over time, but is just jumping in and out of the same ones repeatedly. Not much effort or time required, if the issue is the time one devotes to the activity.
There are lots of retirees who make investing their major hobby and spend huge amounts of time on it, but they may not trade frequently. The amount of time one can spend researching companies is really unlimited, but does that make it a business or is it still more of a hobby? Retirees would likely see it as a hobby-with-benefits (as I do in regards to this forum).
This brings me back to the question, is it really the time spent that matters, or is it the frequent trading (and winning, if one wins) that is at issue?

October 25, 2021
8:00 pm
AltaRed
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It is primarily whether this is the primary source of income for that individual which I mentioned a few times, including post #46. It is the same for house flippers, art dealers, and the like. If CRA sees trading is the primary source of income, they then look at what else are pertinent facts, e.g. professional trader at his trading desk, amount of time trading (traders don't really research stocks - they are looking at trends and technicals of various sorts).

Some people spend a lot of time in front of terminals using various forms of trading software. Vector Vest was one that was heavily promoted at one time. Seems to have faded... maybe their algorithms were not so good after all?

October 25, 2021
8:53 pm
Norman1
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Bill said
True, Norman1, but not completely convinced. Some of the conditions you put on investors in post 36 are debateable, e.g. "..... the stock can't be an investment if one is not sure of it retaining its value....". Well that's not true, most of us investors aren't ever 100% sure our stocks are all going to retain their value, even that they couldn't go to zero, but that doesn't in any way jeopardize our status as investors.

One doesn't need to be 100% sure. If one were 100% sure, the return would collapse to the return of a government bond.

One needs to be sure that its value is not perishable like the value of a head of lettuce. Whether or not that ends up to be the case is irrelevant to forming the person's intent.

I'm certain of that of every stock I buy. I know from experience that 1-in-5 to 1-in-4 of those stocks won't end up as I imagined. But, I don't have standing stop loss orders or put options to "insure" against those losses. Those things don't actually work anyways. The losers are part of the cost of investing.

One of my successful investments is in the Bank of Montreal shares. Bought around $28. Drifted down to $24 after six months for no fundamental reason. -14%! I saw no reason to do anything. Its long term prospects remain unchanged. TFSA_Newbie would likely have had a heart attack with that kind of decline!

Since then, each $28 share I bought split twice and is now four shares worth a total of 4 x $137 = $548. Those four shares currently pay $16.96/year in dividends or 60% of the $28 I spent on them.

That $28 => $548 is what forms my intent. Did I need to care that the shares had dipped to $24 on their bumpy way up to $548?

That's how an investor is supposed to see things.

The investor and the trader want to get ahead. But, the intent is very different which results in very different transaction patterns.

October 25, 2021
10:52 pm
Norman1
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Loonie said
I'm just wondering if it's really possible to get ahead of longer term investing by the stop-and-go method with a 1% stop loss. It seems to run contrary to what we've always been told about investing.

Strategies like that don't work in practice.

1% stop loss becomes a market sell order when triggered. One is not guaranteed a fill at -1%. So, the loss won't necessarily be just 1%.

One can use a stop limit order that turns into a limit sell order. But, if the best bid already below the limit price, then the sell order won't fill and one will still own the shares.

Hedge funds use all sorts of tools like those. They don't enhance returns.

Warren Buffet's ten-year $1 million bet with the hedge funds, written about in CNN: Warren Buffett beat the hedge funds, supports that.

Ditto with stock options. Most stock options end up expiring worthless. Morton Shulman, author of Anyone Can Still Make a Million, learned that fact and had an epiphany: One can make a killing then by being the writer of those options! sf-smile

He and a partner started an option writing venture and lost their shirts.

October 25, 2021
11:07 pm
Loonie
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Thanks for the info, Norman.
It's not something I would ever do, but it sounded like maybe this is what OP is doing, and I was just wondering about it.

October 26, 2021
5:31 am
savemoresaveoften
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Loonie said
This brings me back to the question, is it really the time spent that matters, or is it the frequent trading (and winning, if one wins) that is at issue?  

I dont think the time spend matters, CRA cant proof how much time u spend trading vs investing each day anyway.
Its what you do on your day job (if u have one), the frequency of trading, how much of ur total gross income is coming from employment vs others, and the size of the TFSA that matters.
As mentioned multiple times, a TFSA total contribution is around $75k, so if a TFSA portfolio is like $0.5mm of more, its likely to raise a red flag for CRA to investigate given its a potential revenue source for CRA to go after.

October 26, 2021
7:48 am
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Bill said
There you go, all sorts of opinions! I personally don't see using stop-losses once a week, on its own, enough to be operating a business but Judge Norman1 might rule against you. That's why we have Tax Courts, Federal Court of Appeal, etc., and why the rules are ever-evolving.

Again I feel CRA likes to get a few big fish and then publicize the heck out of it so that the smaller fish voluntarily get in line, then back to sleep, so it would be in my nature not to worry until my account was big enough. And then I would just convert to a few dividend payers with the millions and leave them alone.  

Thanks, I hope so. I really don't want to make up my own rules and also be offside. But yes I am sure my 15K portfolio will not pop up. Unless there is some sort of flag to the CRA for trading X times per year/month?

October 26, 2021
7:55 am
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Loonie said
One thing I am sure of is that nobody should rely on opinions expressed here in the absence of solid documentation. If you want advice on your situation an important matter, consult a professional - as I said at the beginning of this thread.  

Thanks, Loonie. I wonder how many people have someone else (aka a professional) manager their TFSA accounts for them as maybe they would have more insight or maybe they simply just push their clients into their companies mutual fund products? I obviously am self directed 🙂 However I also trust the group and what I have heard so far is that the issue is complex and needs to be dealt with on a case by case basis. Given the differences presented so far it makes me feel better that my confusion was acceptable.

October 26, 2021
8:03 am
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Norman1 said

Loonie said
I'm just wondering if it's really possible to get ahead of longer term investing by the stop-and-go method with a 1% stop loss. It seems to run contrary to what we've always been told about investing.

Strategies like that don't work in practice.

1% stop loss becomes a market sell order when triggered. One is not guaranteed a fill at -1%. So, the loss won't necessarily be just 1%.

One can use a stop limit order that turns into a limit sell order. But, if the best bid already below the limit price, then the sell order won't fill and one will still own the shares.

 

You are absolutely correct with the above. However so far the strategy has worked well for me v.s. a longer term weight average strategy. The issue is that I have a plan for the monies and can't afford to be at the whim of the market when I need to use it. So I like to keep as much cash as I can. After a few people questioned the merits of using stop loss's I didn't comment more on the issue. However I typically use a stop limit order over a stop loss.

October 26, 2021
8:07 am
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Norman1 said

Bill said
True, Norman1, but not completely convinced. Some of the conditions you put on investors in post 36 are debateable, e.g. "..... the stock can't be an investment if one is not sure of it retaining its value....". Well that's not true, most of us investors aren't ever 100% sure our stocks are all going to retain their value, even that they couldn't go to zero, but that doesn't in any way jeopardize our status as investors.

One of my successful investments is in the Bank of Montreal shares. Bought around $28. Drifted down to $24 after six months for no fundamental reason. -14%! I saw no reason to do anything. Its long term prospects remain unchanged. TFSA_Newbie would likely have had a heart attack with that kind of decline!

You are right I would have. However I also would have (hoped) to have sold it at 26/27 and bought it back at 24/25 🙂 Every dollar counts...

October 26, 2021
8:10 am
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Bill said
The intent of investing and trading is the same, to make money, so it might not be a bad idea for some young folks to challenge the old notions of what is a normal level of activity, of what and how much you can and can't do to be considered an investor or trader. Spending your day day-trading is clear, but is swiping your phone a few times every few weeks really operating a trading business?  

I like how you think.....maybe you should switch your scotch for a red bull 😉

October 26, 2021
9:12 am
Loonie
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TFSA_Newbie said

Thanks, Loonie. I wonder how many people have someone else (aka a professional) manager their TFSA accounts for them as maybe they would have more insight or maybe they simply just push their clients into their companies mutual fund products? I obviously am self directed 🙂 However I also trust the group and what I have heard so far is that the issue is complex and needs to be dealt with on a case by case basis. Given the differences presented so far it makes me feel better that my confusion was acceptable.  

I doubt there are many who hire someone to manage a TFSA alone. Unless you got really lucky with a stock that took off big time, you wouldn't have enough money in a TFSA yet to interest those kinds of professionals. Their minimum is typically 500K, sometimes 1 million, and there are a few that will take 250K.

If one wants a manager, at lower levels, one is better off with either a robo-advisor system (e.g. Wealth Simple) or one big diversified balanced fund (e.g. Mawer, I think it's #103 or 104), or a small well chosen selection of ETFs (e.g. one Cdn, one US, one global) which one rebalances oneself every six months or so or when they reach a point where they diverge significantly from your asset allocation intention. When you've accumulated enough, you could move to a professional manager if you wanted.
I doubt very many people on this forum hire a manager. Someone who understands what they are doing can normally do as well without them, and people here seem to like to be in control.
The other day, for example, I was given some unsolicited advice by a well intentioned multi-millionaire, who was willing to give me the name of her wealth manager at Big Six bank. She told me he'd made 18% for her last year and thought that was impressive. I came home and looked up what spouse had gotten on the one mutual fund (diversified) still owned, and the return on that was 18.1% last year. The MER on that fund is higher than what a manager would cost, so in fact this fund did better after MER than her manager. It won't always be this way, but the point is that it's quite rare to get much more value from a manager over time. They are useful, however, for people who might otherwise make stupid mistakes out of ignorance, haste or greed, and I think there are more people in that category than want to admit it. One thing a competent manager should be able to do is keep you below CRA radar.

What I had meant was that you could consult a lawyer or accountant for advice in order to get a more reliable opinion on the complexities of TFSA investing.

October 26, 2021
10:00 am
savemoresaveoften
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TFSA_Newbie said

Norman1 said

Bill said
True, Norman1, but not completely convinced. Some of the conditions you put on investors in post 36 are debateable, e.g. "..... the stock can't be an investment if one is not sure of it retaining its value....". Well that's not true, most of us investors aren't ever 100% sure our stocks are all going to retain their value, even that they couldn't go to zero, but that doesn't in any way jeopardize our status as investors.

One of my successful investments is in the Bank of Montreal shares. Bought around $28. Drifted down to $24 after six months for no fundamental reason. -14%! I saw no reason to do anything. Its long term prospects remain unchanged. TFSA_Newbie would likely have had a heart attack with that kind of decline!

You are right I would have. However I also would have (hoped) to have sold it at 26/27 and bought it back at 24/25 🙂 Every dollar counts...  

Dont we all want to buy low and sell higher all the time ? hindsight is 20/20 tho

October 28, 2021
8:35 am
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savemoresaveoften said

Dont we all want to buy low and sell higher all the time? hindsight is 20/20 tho

I agree. It was not certain that the shares would drift further down to $24 when they had drifted from $28 down to $26.

The shares could have drifted down to only $25¼ and then headed back up, never tripping the buy at $24 or $25.

Trader Jesse Livermore wrote in the 1920's about traders who tried to capture that last bit of money: “One of the most helpful things that anybody can learn is to give up trying to catch the last eighth [of a dollar in the price]---or the first. These two are the most expensive eighths in the world.”

In the end, it wasn't that important that I bought at $24, $25, or $28. What was important was that I bought at one of those reasonable prices and stayed invested on the way to $548.

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