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TFSA Swapping - Guilty
October 25, 2019
4:48 pm
Save2Retire@55
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Nice read even though I have no clue what this swapping means but I recall we had a discussion about TFSA and too many transactions last year. Of course 5K became 200K is nothing CRA can handle emotionally.
Why do they even care how people invest or take advantage of the TFSA?

https://www.google.ca/amp/s/business.financialpost.com/personal-finance/taxes/woman-who-used-swaps-to-run-tfsa-up-to-200k-from-5k-in-one-year-suffers-triple-loss-in-court-appeal/amp

October 25, 2019
5:54 pm
Norman1
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Turning a $5,000 TFSA into $200,000 TFSA is not a problem. How one does it is the issue.

One can't do it by repeatedly swapping stocks out of the TFSA in return for cash above fair market value and swapping stocks into the TFSA in return for cash below fair market value like the woman did:

For all of the swap transactions, the price selected for the shares swapped out of her TFSA was the highest price at which they had traded during the day up to the time of the swap. Conversely, for the shares swapped into her TFSA, the price chosen was the lowest at which they had traded.

As well, I found earlier that Income Tax Act subsection 146.2(6) excludes business income actively generated in a TFSA from being tax free.

October 25, 2019
9:39 pm
Save2Retire@55
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I understand for business transactions but why CRA is fighting those smart traders who can benefit from TFSA? Of course no one can turn a $5K to $200K without a repetitive buying low selling high. I am not encouraging nor saying playing with stocks is a good idea. I am just wondering why CRA wants a piece from everything? The rule should be put max X amount a year and do whatever you want and gain whatever you gain (or lose) as long as it stays in the TFSA account without violating the withdrawal yearly.

October 25, 2019
10:23 pm
Norman1
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The swaps were her TFSA buying from and selling to herself. Not buying from and selling to someone arms length over a stock exchange.

She repeated directed her TFSA to sell shares to her regular account at above market values and to buy the shares back from her regular account at below market values. There was no actual net profit; the shares just moved back and forth between her TFSA brokerage account and her regular brokerage account.

However, each round trip resulted in more cash in the TFSA account, from her regular account, without using up any TFSA contribution room.

October 26, 2019
5:20 am
Norman1
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The full details are in the Federal Court of Appeal case CanLII: Louie v. Canada, 2019 FCA 255.

October 26, 2019
5:46 am
Bill
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Though the fact that someone has a large TFSA balance might draw CRA's attention, there is nothing wrong per se with unusually large returns. For example, if you buy shares that explode in value while in your TFSA good for you, no problem.

There are lots of rules re TFSAs that most don't know about. There are prohibited investments, you can't do business activity via a TFSA (i.e. regular, continuous profit-seeking activity) as Norman1 points out, etc. Also prohibited are "investments or transactions that are structured so as to artificially shift value into or out of the plan or result in certain other supplementary advantages" and swaps are specifically listed as being one of these "advantages".

These rules don't matter for 99% of TFSA contributors but if you're going to do something convoluted or out of the norm then it might be an idea to check the rules or be prepared to go to court to let a judge decide if you or CRA is interpreting the law's intent correctly.

October 26, 2019
7:05 am
Save2Retire@55
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I repeat myself. I am just wondering why CRA is fighting people's gain if it is an individual gain and not business related regardless of the used method or channel as long as it is a legal activity. That's a very simple question.

October 26, 2019
7:51 am
Norman1
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Buying and selling shares between one's TFSA and oneself (swapping) using artificially low/high prices was never legal. All TFSA asset swapping, regardless of price used, is now explicitly banned.

I think you missed the point that she didn't really make $200,000 in her TFSA. What she did was, through a series of swap transactions, got an additional $200,000 of her assets from outside her TFSA into her TFSA in less than one year.

Flipping shares, houses, or laundry detergent is perfectly legal. But, those activities are "adventures in the nature of trade" that are activities of a business and not considered to be investing.

Taxation of business gains is different than that of investment gains.

There's lots of legal history in this area that predates the birth of the TFSA in 2009 and even before the start of Canadian taxes on capital gains in 1972. For example, I found a case earlier about someone using the principal residence tax exemption to avoid taxes on their seven flipped houses.

October 26, 2019
11:52 am
Bill
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Save2Retire@55, because certain gains or activities by individuals are subject to tax and/or penalty, that's why. In this case, the Income Tax Act levies a penalty tax on individuals who do these swaps involving TFSAs, CRA's mandate is to enforce that Act.

October 26, 2019
3:12 pm
AltaRed
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Norman1 said
I think you missed the point that she didn't really make $200,000 in her TFSA. What she did was, through a series of swap transactions, got an additional $200,000 of her assets from outside her TFSA into her TFSA in less than one year.
  

That is the key point. An illegal transfer of assets into the TFSA. Hard to believe people think they can 'cheat' the system like that. It ultimately cost here dearly.

October 27, 2019
6:43 am
savemoresaveoften
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Shes a sophiscated investor and definitely cant claim "I dont know, honest mistake blah blah" especially when did the swap 71 times !!

And even for those who are NOT engaged in any swapping activities but have TFSA investment being "too successful". CRA can come after you as well. Another article earlier from G&M talked about those who used TFSA account to do risky / leverage speculation and amassed high 6 digits. CRA flagged it as "not in the true spirit of the intention of the TFSA account" and tax the gain on those accounts.
Unlikely RRSP which one ultimately pays tax, TFSA is tax free, so CRA "looks" at it quite differently.

October 27, 2019
8:40 am
Norman1
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She was quite audacious.

2009 was the first year TFSA's were available. She opened a TFSA with TD Waterhouse in January 2009. Made the maximum $5,000 contribution. By December 31, 2009 value of her TFSA, with the 71 swaps, was $206,615.09!

October 27, 2019
8:44 am
Norman1
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The TFSA balance is a screening tool used by CRA. How one ended up with a high balance in a TFSA is what matters.

As Bill mentioned, if one had bought and held shares in a TFSA that exploded in value because of business success (like a startup pharmaceutical company that finds a cure for cancer), then there's no problem.

However, if one ended up with the large TFSA by habitually flipping shares, then it looks like an investment dealer business is being run through the TFSA. The shares involved are then inventory and not investments.

Active business income is not included in the tax exemption of the TFSA.

October 27, 2019
10:36 am
Bill
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Per CRA, "Some of the factors to be considered in ascertaining whether the taxpayer's course of conduct indicates the carrying on of a business are as follows:
(a) frequency of transactions - a history of extensive buying and selling of securities or of a quick turnover of properties,
(b) period of ownership - securities are usually owned only for a short period of time,
(c) knowledge of securities markets - the taxpayer has some knowledge of or experience in the securities markets,
(d) security transactions form a part of a taxpayer's ordinary business,
(e) time spent - a substantial part of the taxpayer's time is spent studying the securities markets and investigating potential purchases,
(f) financing - security purchases are financed primarily on margin or by some other form of debt,
(g) advertising - the taxpayer has advertised or otherwise made it known that he is willing to purchase securities, and
(h) in the case of shares, their nature - normally speculative in nature or of a non-dividend type."

CRA goes on to say having one of these factors would not normally constitute carrying on a business, you would need a number of them to be present for them to consider it to be active business activity and thus not eligible for TFSA. So, for example, having speculative shares, per (h), on its own is not a problem.

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