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What is excessive trading and other tfsa risk questions re: taxation
January 10, 2021
4:59 am
mikehampel
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If you are establishing some core positions (say up to 20-30 long term holdings) to hold long term (say over 1 year or indefinitely) but trade around them to:

1. establish position safely and slowly by adding 1-10 shares as opportunity allows,
2. if there is a crash or bubble and you take some crazy profits to manage your risk but maintain a long-term core position
3. sell completely or slowly some positions you feel you made a mistake or found a better security to hold as a core position in the same industry/field.

Is that considered ok in TFSA without trigger for tax challenges?

Also, some have suggested 50 trades/quarter to establish a position or adjust /trim it is ok, but where does this number come from? Can it be more, or less?
What if you buy 1 share of a 10$ stock every day for a year. That's only 3000$ but it's a kind of dollar cost averaging. Yet you would show 300 trades yet all are buys. Maybe you adjust downward a few times too but end the year with a core position.

Also is arbitrage allowed? That is you buy a stock on Day 1, and 6 months later the company is merged and you get cash back. You may make very few trades to establish this position and usually the deals close within 1 year.

Of course it could look like a real position but you know that it is being merged in a cash and cash/stock deal. Do you have to own the position before the announcement or can be purchased after?

Generally very small trades around a core position can add up but it seems to me the philosophy is to maintain a long-term core position but you'd be crazy not to sell some on a huge raise or a crash. Can cra force you to take a loss by holding if you think a stock is crazy priced (upside or downside)?

January 10, 2021
9:14 am
Bill
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You can't operate a business within a TFSA, so if your TFSA activity is business-like you may be selected for scrutiny. No magic number of trades, etc is allowed or disallowed, CRA makes its call on things like frequency of transactions, how long you hold your positions, your own market knowledge, financing of investments, time you spend on trading, etc. It's a grey area that CRA has kept grey re TFSAs, they've not published clarity as far as I know, they use the business test as a blunt instrument, and likely what triggers their scrutiny is if you have large amounts in your TFSA. I'm guessing they've mainly targeted day traders known to them plus investment industry pros with large TFSA balances, along with anyone else that's got a very large TFSA balance as to CRA that's a red flag of possible business activity. Nothing wrong with having a large balance, but if you did it via operating a business (of investing, I guess) within a TFSA then you're offside.

Norman1 might have an update re jurisprudence on this issue of business activity within a TFSA, I'm not sure if anything has hit the courts yet on this.

January 10, 2021
10:13 am
Norman1
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This topic was discussed previously in the topic CRA targeting successful TFSA investors.

We had found that TFSA trusts are exempt from income tax as the result of Income Tax Act subsection 146.2(6). As Bill mentioned, the income from running a business inside a TFSA trust is not included in the TFSA exemption from income tax. That means gains from running what is effectively an investment trading/dealing business in a TFSA are not tax free.

There are lots of decisions about what is an "adventure in the nature of trade". It is a very established concept legally. Gains from adventures are actually taxed as income instead of as capital gains. I mentioned one case involving adventures and the principal residence exemption.

The only thing new is adventures being applied to TFSA trusts.

The number of trades is only part of what is considered. It is really the intent of the taxpayer that decides. That intent can be revealed by the taxpayer's behaviour, including the number and nature of the transactions.

January 10, 2021
11:18 am
mikehampel
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My confusion is the difference between investing (presumably what the TFSA is for) and a business of investing. Surely CRA does not expect even relatively passive investors accumulating positions and selling them from time to time to not research their positions to decide what to own and when, make mistakes on selecting an investment occasionally or perhaps give up risk management and/or dollar cost averaging strategies? In a market crash I am sure many passive investors may either buy or sell and depends on the external environment. I suppose one can be an active investor but not an active trader, although trading is merely the mechanics of establishing a potentially long term investment. The line as mentioned appears grey.

January 10, 2021
12:02 pm
Bill
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I checked and couldn't find any jurisprudence yet considering this issue re TFSAs. But as Norman1 points out there are well-established principles to help establish whether or not someone is conducting a business or conducting an adventure or concern in the nature of trade.

mikehampel, the passive investors you describe would be fine, in my view. To me, a business requires some level of regular or continuous activity. Of more interest to me re grey area is the concept of adventure or concern in the nature of trade, i.e. that could include irregular, sporadic or occasional behaviour where the main motivation is to turn a profit, from what I can tell.

FWIW, here is the key part of the Income Tax Act definition of "business": "............includes a profession, calling, trade, manufacture or undertaking of any kind whatever and......an adventure or concern in the nature of trade". Note however that "includes" doesn't mean there couldn't be other activities that CRA might decide falls into the definition too.

Again, how would it come to CRA's attention in the first place? If your TFSA account gets, too big considering how long TFSAs have been around. So split up your TFSAs at various brokerages, maybe that would help.

January 10, 2021
12:09 pm
mikehampel
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If Cra looks at size of results doesn't that mean they are in the business of judging investment returns , in a way giving an opinion on stock market returns or why you were successful because of your studies? IF we are in a bubble, taking gains would seem to be a way to protect yourself. I remember stocks like ballard went from 8 to 200 then back to like 2 for 20 years. Imagine the move from 8 to 200 happened in 1 week or 1 month, not selling would be a big mistake.
I still can't seem to understand how investment is different than a business. Anyone who invests is trying to make money by selling shares at a higher price than they bought them. Many stocks do not pay dividends. Does it mean no non-dividend paying stocks can be held in a TFSA for growth (and eventual sale)? surely not. I totally understand daytrading, but that means 24 hours. What about 48 hours, 1 week, 1 month? What if the stock quadruples or falls by half in a month. surely you shouldn't stare at your losses of 80% without doing anything and lose all your capital. I can't seem to understand if cra wants to determine what you do exactly in the account, even what you own and what result you are entitled to. If so, how can anyone make decisions under such tax uncertainty?

January 10, 2021
12:26 pm
Bill
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CRA has no clue what specifically we're doing in our accounts, I'm not even clear how they (really we're talking about their computers) would know our balances - don't the fi's just report our contributions and withdrawals? Maybe not.

CRA's computers know what GIC rates are, they know what the markets are doing, what the average investor/saver can expect to have made, etc, etc. They will flag folks at the extreme deviation from these norms as well as people whose own tax reporting deviates inexplicably from their historical pattern.

But I wouldn't focus on time spent on the portfolio, or any one indicator for that matter, CRA would look at the totality of all factors, the big picture of what you're doing, before they reassessed. And actually they probably do very little, they use the media to create the impression they're on to an area of abuse and they rely on the fact 90% of folks get scared enough to comply because they've heard CRA is clamping down. 90%'s good enough for them, job done, back to sleep.

January 10, 2021
12:31 pm
mikehampel
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Every transaction is reported, "https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4477/tax-free-savings-account-tfsa-guide-issuers.html#P11"

"Enter all numeric characters (for example 2019-09-28). You must enter the transaction date of each individual transaction."

"The CRA has said that it looks to set of factors to determine whether a TFSA has been carrying on a business, including the frequency of trading, whether the TFSA holder has specialized knowledge of the markets, and the time the TFSA holder spends on researching trades"

How exactly would they know how much research you did on a trade? And isn't it normal to research anything you do in an investment account?

Also anyone know if the issue is realized gains or also unrealized ones? I guess in a tfsa, unrealized gains look like longer-term investments while realized ones may be more current. Is tax on a tax-free savings account based on the realized portion of gains?

January 10, 2021
12:50 pm
Norman1
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mikehampel said
Every transaction is reported, "https://www.canada.ca/en/revenue-agency/services/forms-publications/publications/rc4477/tax-free-savings-account-tfsa-guide-issuers.html#P11"

"Enter all numeric characters (for example 2019-09-28). You must enter the transaction date of each individual transaction."

That's certain external TFSA transactions, like contribution, withdrawal, and marriage transfer in/out transactions. That does not include internal transactions in the TFSA like an investment purchase or sale!

"Calendar year end fair market value" is also reported. So, CRA can tally up how much all one's TFSA accounts grow from year to year.

CRA is not limited to just that info. They can request more detailed info.

Investors have very different motivations and, consequently, very different transaction patterns from an investment dealer or a speculator. Just think stamp collector versus stamp dealer. Are the stocks investments or are the stocks just inventory?

It's only uncertain when one is actually behaving like an investment dealer or a speculator and then tries to make it look like investing.

January 10, 2021
1:03 pm
Norman1
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mikehampel said

How exactly would they know how much research you did on a trade? And isn't it normal to research anything you do in an investment account?

You'll be asked by CRA and, if it comes to that, by the Tax Court judge.

Also anyone know if the issue is realized gains or also unrealized ones? I guess in a tfsa, unrealized gains look like longer-term investments while realized ones may be more current. Is tax on a tax-free savings account based on the realized portion of gains?

Any actual tax is based on realized gains.

That's just a timing issue. Tax will be assessed later when the other gains are realized if those "investments" are actually "inventory" for an adventure.

January 10, 2021
4:24 pm
pooreva
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Simple question: You had $60,000 in your TFSA and you bought 900 TSLA shares last year at $67/share. You sold it last Friday at $1300/share. Your TFSA now has $1,170,450 cash.
Will anybody go after you? This is TFSA so no tax to pay. CORRECT?

January 10, 2021
5:09 pm
Loonie
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Would time spent on research necessarily be a negative?
Day traders do no research at all.

The reason CRA keeps track of end of year balances may be so that they can report on how much tax the gov't is missing out on.

January 10, 2021
5:15 pm
topgun
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Most people will do the opposite. Buy $60,000 at the high and see it go to 0-10%.

Have a Great Day

January 10, 2021
7:04 pm
Bill
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pooreva, assuming you're not doing anything else, the fact you made a great return on its own doesn't mean this has been done as part of investment business activity, so if I was the judge I'd say you're ok. But I'd kinda be guessing.

To me, the stock pays no dividend so it was clearly bought to flip instead of to earn income, and you did hold it for only a short time (but who wouldn't sell with gains like that?), but those aren't enough factors to say you were doing this as a business, is my guess. So no tax on legitimate gains inside TFSA, enjoy the dough!

That's not to say CRA wouldn't reassess just to provoke a court case to provide some clarity in this relatively new area. Or sometimes they want to avoid court if they think they might lose, ignore the few who are profiting to keep it on the down low. You never know what they'll do.

January 10, 2021
9:51 pm
topgun
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pooreva said
Simple question: You had $60,000 in your TFSA and you bought 900 TSLA shares last year at $67/share. You sold it last Friday at $1300/share. Your TFSA now has $1,170,450 cash.
Will anybody go after you? This is TFSA so no tax to pay. CORRECT?  

Who is you? First I know the Canadian dollar is increasing. A year ago it was 76.53 cents. Today it is 78.43 cents. When converting you pay about 1.7% each way. TSLA not even close to $1,300C. TSLA was not close to 67.5C a year ago. The numbers are misleading. Why would any one bother you? It is a tax free savings account. No tax on dividends or capital gains.

Have a Great Day

January 11, 2021
1:20 am
mikehampel
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It is incomprehensible to me that time spent on research can ever be the only criteria. 100% of people should be doing research to buy or sell anything, long-term, short-term, any-term if they own a self-directed tfsa or rrsp, otherwise they'd do a fully managed account.

TFSA seems like the sword of cra dangling over your head every day. I am not sure if investing in canada is at all possible with such legal uncertainty.

On the other hand, the lawyers and brokers DID seek out legal certainty and got it from CRA. Tell me, why do they get certainty but the regular canadian has to struggle with guesses and risk of tax audits??

"According to the CRA, as of Dec. 31, 2018, it had assessed approximately $114 million in taxes resulting from its audits of TFSAs between 2009 and 2017, some of which was related to TFSAs being determined to be carrying on a business."

"“What the budget measure does is provide clarity in terms of which party is responsible for that liability [related to tax owing for carrying on a business in a TFSA],”" https://www.advisor.ca/tax/tax-news/clients-day-trading-in-their-tfsas-theyre-ultimately-liable-for-the-tax/

Where is the taxpayer's clarity??

January 11, 2021
5:15 am
savemoresaveoften
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topgun said
It is a tax free savings account. No tax on dividends or capital gains.  

That is a weak argument and CRA already made their case that is NOT universally true for all TSFA account.

The key word is "Savings" and CRA makes it a very grey area (by default, savings by itself are 100% taxable, not capital gain. They just add the "tax free" not to imply you can do all you want.) If they want to, they can easily argue putting all the TFSA money into Tesla is a speculative investment and not in the "true spirit" of savings. Good luck trying to argue that if they decide to go after such an account.

On the other hand, if I had put $60k total into Tesla since the TFSA account started for the past 10 years, I would not mind paying some capital gain tax as I am still laughing to the bank. Unfortunately I dont so I dont have to worry about this potential tax problem either...

January 11, 2021
7:40 am
Bill
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I don't think anyone's ever said time spent on research is the only criterion.

The prohibition is on conducting business activity within a TFSA, it is not about prohibiting a speculation as in the Tesla shares example, i.e. "securities listed on a designated stock exchange" are listed as acceptable investments, there is no "spirit of savings" requirement. You can hold the same variety of investments as in RRSPs, another registered plan/account with the term "savings" in it.

The issue about conducting a business is not really a CRA issue to clarify, it comes up in various taxation situations and there's a fair bit of case law out there which has established the guiding factors and principles to apply. The link provided in post #16 doesn't really deal with that, it just clarifies the usual principle that taxpayers, not their advisors, are ultimately liable, as they are in all tax matters, in the case of their TFSA reassessments.

January 11, 2021
8:04 am
savemoresaveoften
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Bill said
The prohibition is on conducting business activity within a TFSA, it is not about prohibiting a speculation as in the Tesla shares example, i.e. "securities listed on a designated stock exchange" are listed as acceptable investments, there is no "spirit of savings" requirement. You can hold the same variety of investments as in RRSPs, another registered plan with the term "savings" in it.  

I think the diff in the eye of CRA is money inside RRSP will get dinged with tax at some point, while the TFSA is tax free forever (technically).
Thus they dont really care what you use RRSP for, while a higher scrutiny is placed on the activities inside a TFSA.

Just like any investment outside of registered accounts are already funded with after tax money, yet any extra return via investment/specualtion/GIC get tax yet again.

January 11, 2021
9:01 am
mikehampel
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There are many countries that have explicit rules that are clear, black and white. I'll give you an example. In Czech Republic, any investment held for 3 years or longer is not taxed. Anything less is 15%. Simple, clear. Another system:
Canada on the other hand instills fear in investors who do not know if what they do is allowed or not. To the person who said that Tesla might be taxed in a TFSA because you made ''too much money' and succeeded too much (Canada can now define what success is or is not), then why not just own it outside a TFSA and forget the entire account? I suspect people use it and take the risk but it certainly is no way to conduct one's estate with a government that does not tell you black or white what you can use the vehicle for or not.

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