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What is excessive trading and other tfsa risk questions re: taxation
January 11, 2021
4:43 pm
Norman1
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An "adventure in the nature of trade" outside of a TFSA is still an adventure. CRA will reassess and tax the gains as income instead of capital gains.

It has nothing to do with "too much money". The issue is the intentions involved in making that money.

If someone turned $60,000 in their TFSA into $1.2 million in less than a year, that person better not have a history of buying stocks and holding them for no more than a year. That kind of transaction history is indicative of someone dealing or trading in stocks and not investing in them.

Someone with that kind of history should start looking for a good tax lawyer!

In contrast, someone who signed with commission-free Wealthsimple Trade and has been buying one share of an S&P 500 ETF each week to build a portfolio has nothing to worry about. 52 buys a year and zero sells don't suggest the person is dealing or trading in stocks.

January 11, 2021
5:28 pm
Winnie
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Norman1 said
It has nothing to do with "too much money". The issue is the intentions involved in making that money.

If someone turned $60,000 in their TFSA into $1.2 million in less than a year, that person better not have a history of buying stocks and holding them for no more than a year. That kind of transaction history is indicative of someone dealing or trading in stocks and not investing in them.

Someone with that kind of history should start looking for a good tax lawyer!

In contrast, someone who signed with commission-free Wealthsimple Trade and has been buying one share of an S&P 500 ETF each week to build a portfolio has nothing to worry about. 52 buys a year and zero sells don't suggest the person is dealing or trading in stocks.  

I respectfully disagree.
TFSA deposit $60,000. TFSA withdrawal $1.2 million anytime is perfectly fine, if you accumulated that amount legally inside that TFSA via buying, holding or trading. And your TFSA room for the next year will be $1.2 million + $6000.

January 11, 2021
5:40 pm
Norman1
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Winnie said

I respectfully disagree.
TFSA deposit $60,000. TFSA withdrawal $1.2 million anytime is perfectly fine, if you accumulated that amount legally inside that TFSA via buying, holding or trading. And your TFSA room for the next year will be $1.2 million + $6000.

It is not as easy as that. Read the history and Income Tax Act subsection 146.2(6) mentioned earlier. That's the whole point of this thread.

January 11, 2021
6:06 pm
Bill
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The amount isn't really the critical issue, aside from the fact that it might be the thing that catches CRA's eye.

Buying Tesla shares and making $1.2M on them is not at all akin to regularly and frequently buying and selling various securities and making $1.2M. The TFSA rules say you can't operate a business (which includes "adventure or concern in the nature of trade", look up the term if you need) within a TFSA, and frequent activity within the TFSA is an indicator that might (might!) be going on.

Regarding other countries, a tax system that has very different tax treatments for something held for a day less than 3 years vs something held for a couple of days longer sounds kind of weird to me, arbitrary really, and would just encourage its own varieties of manipulations to get around such black and white rules. Canada's legal system, based on English common law (outside Quebec), is based on interpretation and precedent - messier for sure but to me a more democratic, living, evolving system as society constantly evolves.

January 11, 2021
7:32 pm
Loonie
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I don't think the Tesla example contravenes any existing rules for TFSAs. The purchase itself is legitimate; nobody has argued against that. When you buy, you really don't know if the investment is going to succeed or fail or by how much. You are not in control of how much it may increase. You are only in control of when you sell it.
I would have considered it a highly speculative investment. But, as someone pointed out, there is no law against that as long as it's on the stock market. With a spectacular rise like that, it would be prudent to take some profits. Who could argue against that?

If I were the CRA, I wouldn't go after this person. But if I were the government, I'd be keeping stats on how much individuals held in their TFSAs and how much contribution room they had. Based on that information, I'd be considering capping the amount that could be held tax free or in recontribution room. This would not be relevant to RSPs because in that case, the more you make, the more the government makes.

January 12, 2021
6:15 am
savemoresaveoften
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Loonie said
I don't think the Tesla example contravenes any existing rules for TFSAs. The purchase itself is legitimate; nobody has argued against that. When you buy, you really don't know if the investment is going to succeed or fail or by how much. You are not in control of how much it may increase. You are only in control of when you sell it.
I would have considered it a highly speculative investment. But, as someone pointed out, there is no law against that as long as it's on the stock market. With a spectacular rise like that, it would be prudent to take some profits. Who could argue against that?

If I were the CRA, I wouldn't go after this person. But if I were the government, I'd be keeping stats on how much individuals held in their TFSAs and how much contribution room they had. Based on that information, I'd be considering capping the amount that could be held tax free or in recontribution room. This would not be relevant to RSPs because in that case, the more you make, the more the government makes.  

I think the choice of names reflects the CRA's intention. RRSP = retirement savings, while TFSA = tax free savings. One is ultimately taxable, the other one is not. Making 20x on any investment within a relatively short period of time is speculation and not savings purpose, regardless of which account it is in.
We can interpret all we want, but if CRA decides to make a fuss about your outsize return in a "savings" account, you are in trouble. It is easier to fight the government than the CRA in my mind. Just like you dont want to mess with customs at the airport. Who has more to lose in the end....

January 12, 2021
7:25 am
Winnie
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I was talking about legal investments only.

Generally, the types of investments that are permitted in a TFSA are the same as those permitted in a RRSP. These would include:
cash
mutual funds
securities listed on a designated stock exchange
guaranteed investment certificates
bonds
certain shares of small business corporations

Non-qualified investment – any property that is not a qualified investment for the trust. For more information, see Income Tax Folio S3-F10-C1, Qualified Investments – RRSPs, RESPs, RRIFs, RDSPs and TFSAs.

Prohibited investment – this is property to which the TFSA holder is closely connected. It includes any of the following:
a debt of the holder;
a debt or share of, or an interest in, a corporation, trust or partnership in which the holder has a significant interest (generally a 10% or greater interest, taking into account non arm's length holdings)
a debt or share of, or an interest in, a corporation, trust or partnership with which the holder, does not deal at arm's length

A prohibited investment does not include a mortgage loan that is insured by the CMHC or by an approved private insurer. It also does not include certain investment funds and certain widely held investments which reflect a low risk of self-dealing. For more information see Income Tax Folio S3-F10-C2, Prohibited Investments – RRSPs, RESPs, RRIFs, RDSPs and TFSAs.

It's very simple.

January 12, 2021
8:20 am
Bill
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Winnie, it's true, there is a broad range of investments that are ok.

But there is more to the rules. What we've been talking about is that, i.e. you can't be operating an investment business (including an adventure or concern in the nature of trade) within your TFSA. Even using acceptable investments.

January 12, 2021
8:21 am
savemoresaveoften
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Winnie said
It's very simple.  

One thing I learned over the years re CRA is "it is never simple". When a tax code is over 1400 pages, there is nothing simple about it.....

But for most TFSA accounts, unless one is actively trading (Ins and Outs), they are not on the CRA's radar. Banks use 150 trades a quarter to loosely defines "active investors", maybe CRA uses similar.

January 12, 2021
9:10 am
Norman1
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CRA has not given a size threshold for their TFSA audits. People who have received CRA queries about their TFSA's suspect CRA's threshold is in the $250,000 to $500,000 range.

That threshold is not evidence of guilt. It's just a point where the taxpayer is flagged for further investigation.

It is not an issue of whether the stock is a qualified investment, non-qualified investment, or prohibited investment. It is a question of the TFSA owner's intent for the stock.

June 2017 Financial Post article Stop using your TFSA to frequently trade stocks… highlights what the issue is:

The judge quoted prior jurisprudence which stated that “All of these cases turn on their own facts and illustrate the importance of the factual underpinning that supports a finding that a person has crossed the line from investing to trading.”

Or, as tax law professor Vern Krishna wrote in his monumental tome on tax principles, “Was the taxpayer intending to trade (do business) or invest (hold property)?

January 12, 2021
9:31 am
Winnie
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Thank you Norman1, Bill, savemoresaveoften.

Yes, I understand, that an issue is: “Was the taxpayer intending to trade (do business) or invest (hold property)?”.

Correct, it's hard to predict or define possible CRA interpretations.
It's never simple, I agree.

January 12, 2021
9:56 am
Bill
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Maybe it's clearer when one sees the Income Tax Act wording:
"No tax is payable under this Part by a trust that is governed by a TFSA on its taxable income for a taxation year, except that, if at any time in the taxation year, it carries on one or more businesses or holds one or more properties that are non-qualified investments".

So, with regard to the first exception (before the "or"), then the question becomes what constitutes carrying on a business, and that's where the grey areas arise.

The canada website page re TFSAs has info regarding what are non-qualified investments, it really doesn't have much if any info re the other exception, the carrying on of a business part.

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