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What is excessive trading and other tfsa risk questions re: taxation
April 10, 2023
7:13 pm
Bill
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All 7 elements have to be considered together before the determination is made, one element alone will not settle the matter re carrying on a business or not.

April 10, 2023
7:22 pm
mordko
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savemoresaveoften said
What I find interesting is while it ‘appears’ to us that all CRA receive is the annual contribution per our CRA online profile, in reality a lot more details are being reported to CRA. The info such as portfolio value, withdrawal, AND all account activities are being reported/recorded by CRA !

I also have to give kudos to the guy who turned $15k into $600k in 3 years. That is beyond Buffet or good luck. To me that sounds more insider trading !! Lol  

Covers the period of pandemic with lots of volatility and when risky assets provided great returns. Lots of people do this. The amazing thing about Buffet is consistency over many decades. He was never one for the quick buck.

By the time this chap pays his taxes, interest and legal bills he’ll be nursing a loss.

April 10, 2023
10:36 pm
Norman1
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Doug said

… One could have a more actively managed portfolio and higher portfolio turnover than others, but that doesn't mean they're investing for business purposes. Buying and selling two or three stocks in less than a year, provided they're not highly speculative stocks (i.e., penny stocks), could still be deemed to be legitimate. For example, one person buys Laurentian Bank at the bottom of its historical 52-week average pricing range, then sells it at the midpoint or near the top of that same average pricing range 9 months later then reinvests the proceeds in another blue chip stock that is technically and/or fundamentally 'cheap'. Someone buying and selling penny stocks like Hut 8 Mining, Mogo Technology, and VersaBank in less than a year may have a more difficult case, though, no?

No. One needs to demonstrate intent to invest or hold property as opposed to intent to deal in or trade inventory.

What you described clearly shows intent to trade the Laurentian Bank shares and not to hold them. Doesn't matter if the shares were Laurentian Bank shares or some penny stocks. An investor does not buy at the bottom of a 52-week price range and then sells just because the price climbs to the middle or higher of the range. That's the transaction pattern of a trader or dealer.

Trading is trading. Doesn't matter if it is in blue chip stocks, penny stocks, or horse manure!

April 11, 2023
4:51 am
Bill
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Tend to agree, Doug, element 8 (there are 8, not 7 as I previously said) indicates the nature of the shares, as you indicate, needs to be considered.

Intent can change. I'd say if you habitually and frequently did what you did with the Laurentian shares, or you're otherwise clearly a trader and you sold those Laurentian shares as you describe, that might indicate a business but if you sometimes cashed in a blue chip that had risen nicely, i.e. a reasonable reaction of an investor, then it might not indicates a business. You are allowed to invest, you are not allowed to run a business.

Again, focusing on one or two of the 8 elements is the wrong approach, need to consider all 8 elements in a situation.

April 11, 2023
5:06 am
savemoresaveoften
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I think frequency of trading esp the same name over and over again is something CRA looks at.
Also I assume CRA don’t rec all transactions regularly. Only if they suspect and then demand the owner of the TFSA account to provide the details ? Anyone knows how it works ?
And if it’s a RRSP, they won’t care less cuz 100% is taxable eventually.

April 11, 2023
5:18 am
Bill
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Frequency is one of the elements. Doing something 2 or 3 times a year, as in Doug's example, would not necessarily be an indicator that someone is carrying on a business, if I was judge.

CRA flags high value account, then they would want to be shown how the account value got so high and then go from there. Maybe there are lots of traders with lots of activity that aren't very good at what they do who have a TFSA with $20K in it that never gets flagged by CRA, I don't know.

April 11, 2023
7:20 am
Norman1
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Doing something only two or three times a year may not necessarily indicate a business was being carried on. But, that won't prevent a finding that a business was being carried on. Same with the nature of the shares, whether blue chip or speculative.

People have been found in Tax Court to be running a businesses by flipping houses only a few times a year, like in the Giguère case mentioned previously. In that case, CRA also successfully argued that the taxpayer was grossly negligent for not reporting the business income and the gross negligence penalties should apply.

Those eight tests are guidance and not exhaustive. CRA and the Tax Court are allowed to consider all the facts to determine whether the taxpayer intended to trade or the taxpayer intended to invest.

CRA does not ordinarily get all the internal transactions of a TFSA trust. But, CRA can request that info as part of an audit of the trust.

CRA does get the year-end fair market value of TFSA's as part of the required annual TFSA returns. So, CRA can easily locate high value TFSA's for further investigation.

April 11, 2023
8:29 am
Bill
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Also Tax Court decisions can be wonky. I personally know someone who lost with CRA, lost with Tax Court and then ended up winning, completely exonerated, costs and all (though CRA didn't pay him enough and he was tired enough not to start another legal action against them), at Federal Court of Appeal. Very, very few pursue past Tax Court though, it cost this guy his previously not-white hair plus close to 6 years of effort.

April 12, 2023
9:24 am
Wayno
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Day trader ordered to pay taxes on TFSA investments after holdings grow to more than $600,000

https://www.thestar.com/business/2023/04/12/business-or-tax-free-savings-account-day-trader-who-ran-up-15k-to-617k-in-his-tfsa-ordered-to-pay-taxes.html

The CRA got this right ! sf-cool
... A "professional" investment advisor, day trading in a TSAF; it sure looks like he is running a business !

"An investment adviser who was day-trading stocks through his tax-free savings account was running a business and needs to pay taxes on the profits, a federal tax court judge has ruled.

According to court documents, Vancouver-based investment adviser Fareed Ahamed invested $15,000 over three years in his TFSA, and by the end of the third year, the value of the account had ballooned to $617,371.24.

In his ruling, Tax Court of Canada Justice David E. Spiro said there was no question Ahamed’s investment knowledge and research meant he was effectively running a business.
...
The ruling earlier this spring, however, doesn’t necessarily mean other day traders are at risk, some tax and investment experts say.
“There aren’t many people who are actively trading single stocks through their TFSAs, and most of the ones who do are losing money,” said Dan Hallett, vice president of research at HighView Financial Group, an investment advisory firm.
...
“If you trade a lot, you might be considered to be carrying on a business, and there are some people probably wondering right now if they could be caught up in this,” said Heath, managing director at Objective Financial Partners. “But in this case, him being an investment adviser was a big consideration.”

April 12, 2023
10:09 am
Bill
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More to come, he's appealing to Federal Court.

Appears his argument might be that singling out people in the investment industry for different treatment than people not in the industry, when both are doing exactly the same TFSA activities, is not an appropriate element of the carrying on a business test to consider when it comes to TFSAs, i.e. that element of what you do for a living should not result in some people being treated differently than others when it comes to TFSA activity. If I'm a pro athlete or a politician or a teacher or unemployed but trade frequently in my TFSA vs I have an investment industry job and similarly trade frequently in my TFSA, should that result in a different tax treatment of TFSA gains? I'm guessing he loses if only due to Federal Court's awareness of social consensus re TFSAs, i.e. the rest of us just don't much like folks who hit the jackpot this way in their TFSAs.

April 12, 2023
10:49 am
Wayno
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He is a day-trader !!

Instead of using a normal taxable account, he is using a TSAF to avoid capital gains tax.
Being an investment advisor, he clearly understand the tax rules.
Instead, he chose to break them and is trying to avoid paying tax on >$500K that he earned while running his day-trading business.

April 12, 2023
4:13 pm
Bill
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Wayno, I've read the case and saw no reference to day trading. Where did you get that information from? Did I miss it in the transcript?

The judge's only comment I saw re frequency was he "traded frequently". Curiously I saw nothing more specific, i.e. if he was day trading you'd think that might have been emphasized by Judge Spiro as good support for his decision.

Also, everyone who has equities, etc in a TFSA does so to avoid capital gains tax (as well as tax on dividend income, etc). Nothing illegal there. But a day trader would not be subject to capital gains tax anyway, outside a TFSA it would be fully taxed as business income.

He did not know the rules as I'm not sure anyone necessarily knew the "tax rules" in his situation as no-one knows yet where the line is to be drawn, i.e. the judge went through a lot of legislation, jurisprudence, etc before coming to his decision, it was not an automatic toss out of a case. It is people challenging CRA in court that ends up defining how the rules are generally to be applied, challenges end up clarifying interpretation, and jurisprudence will provide more clarity as TFSAs are around longer and more cases hit the courts.

As I said, I believe the Federal Court will not overturn as TFSAs are a common, high profile activity in society and virtually no-one supports people who have way more in their TFSA than everybody else. We & CRA actually don't mind TFSA day traders if they lose money or make very little, but we certainly don't like them if they make a ton more than the rest of us.

April 12, 2023
6:10 pm
Wayno
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Hi Bill,

Day Trader is mentioned in the news article title, and day trading in the first sentence. However, you are right about your business tax comment.

From the news article:

"Fareed Ahamed invested $15,000 over three years in his TFSA, and by the end of the third year, the value of the account had ballooned to $617,371.24.
In his ruling, Tax Court of Canada Justice David E. Spiro said there was no question Ahamed’s investment knowledge and research meant he was effectively running a business."

If he wins the appeal ... then we should should all consider taking up day trading as a hobby! sf-winksf-wink

regards,

Wayno

April 12, 2023
7:05 pm
Bill
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Perfect example of media making stuff up. And unfortunately based on lack of detail in case decision we really have no idea what "frequently" means. Judge also noted shares were held for "short periods" but again no indication what the judge's opinion of "short" with regard to owning shares is. Not super helpful.

But judge indicated it was his investment knowledge and extensive research time that tipped the scales and it is this that the appellant intends to challenge as an error by the judge, it seems, at Federal Court level.

If he wins the appeal then gov't will either have to live with it going forward or amend the TFSA legislation to be more specific re allowable/not allowable activity.

April 12, 2023
8:56 pm
Loonie
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I don't fault the judge in this case for lack of specificity. He is not there to interpret the law, not to make it.
The law does not provide a definition. If he had invented one, and stated it, the appeal would surely have targeted this as an error, i.e. his opinion, not the law.

I find it odd that the legislation provides no definitions. And there is no indication it ever will.

In my view, the best solution is simply to limit the amount to which a TFSA may grow. Anybody who has 600K+ in growth should pay tax on it. There is no need to define amount of trading or time consumed. It's not the government's business how the money is earned if it's earned legally.
The purpose of the TFSA, shaky though it may be, is surely not to allow unlimited tax avoidance. Nor is it to encourage high risk behaviours with one's money. The purpose was to allow people to be able to save a limited amount of money and hang on to it (hence no tax), investing it modestly in things that are generally considered likely to be fairly safe as SAVINGS vehicles. Day trading doesn't qualify.

April 13, 2023
6:33 am
savemoresaveoften
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I do hope tax court DO consider all 7/8 criteria to determine if its business vs personal.

To me, just because the person has extensive financial / research knowledge does not make that person a trader in his personal portfolio. Nor is the equities names the person trade it in. Penny stocks has both risk and reward, not fair to just target the reward side. Excessive trading activities is the only real /logical criteria to me.

With no clear defined legislation whats is allowed / prohibited for a TFSA trading account vs a savings account, its more of a CRA going after $$$ than anything.

April 13, 2023
7:18 am
Bill
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For reference here are CRA's traditional elements to consider:
(a) frequency of transactions;
(b) period of ownership;
(c) knowledge of securities markets;
(d) security transactions forming part of the taxpayer’s ordinary business;
(e) time spent researching securities markets and potential purchases;
(f) the extent to which debt financing is used;
(g) advertising; and
(h) in the case of shares, whether they are speculative in nature or dividend-paying.

The judge opined that (a), (b), (c), (d), (e) & (h) were determinative in this case.

The appellant argued something else, i.e. that these traditional 8 elements should not apply to TFSAs because of the restrictions applicable to TFSAs (e.g. contribution limits, withdrawal/recontribution rules, etc) that other business activities are not bound by thus leading to differences in normal business strategies inside vs outside a TFSA, i.e. operating a business and operating a business inside a TFSA are apples and oranges, thus people act differently accordingly, thus a different set of elements need to be used for TFSA cases. Is my understanding.

April 13, 2023
7:23 am
savemoresaveoften
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Bill said
For reference here are CRA's traditional elements to consider:
(a) frequency of transactions;
(b) period of ownership;
(c) knowledge of securities markets;
(d) security transactions forming part of the taxpayer’s ordinary business;
(e) time spent researching securities markets and potential purchases;
(f) the extent to which debt financing is used;
(g) advertising; and
(h) in the case of shares, whether they are speculative in nature or dividend-paying.

The judge opined that (a), (b), (c), (d), (e) & (h) were determinative in this case.

The appellant argued something else, i.e. that these traditional 8 elements should not apply to TFSAs because of the restrictions applicable to TFSAs (e.g. contribution limits, withdrawal/recontribution rules, etc) that other business activities are not bound by thus leading to differences in normal business strategies inside vs outside a TFSA, i.e. operating a business and operating a business inside a TFSA are apples and oranges, thus people act differently accordingly, thus a different set of elements need to be used for TFSA cases. Is my understanding.  

I am onside with the appellant, esp as the legislation choose NOT to draw a line in the sand in the first place. If one CANT claim business loss cuz its inside TFSA, it will be so unfair to then tax it as business income. A different set of rule SHOULD apply.

April 13, 2023
8:19 am
smayer97
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So just for reference, the appellant proposed the following alternative criteria for TFSA's:

[29] To address the deficiencies of the traditional test in this context, the Appellant proposes a new test. The Appellant’s proposed test asks three questions: [23]

1. Did the TFSA trust’s business occupy the taxpayer’s time, attention, and labour?

2. Did the TFSA trust incur liabilities in the course of its business?

3. Was the purpose of the TFSA trust to provide a livelihood to the taxpayer?

(from the full ruling:
https://www.canlii.org/en/ca/tcc/doc/2023/2023tcc17/2023tcc17.html )

April 13, 2023
9:58 am
Norman1
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Income Tax Act does draw the line. Subsection 146.2(6) specifically says the TFSA exemption from tax does not apply to a business being run in a TFSA.

Income Tax Act does not need to define what running a business exactly is. Just like the act does not need to define what a gift is. Consequently, the meaning of those are the common meaning that court rulings have established.

According to the government's response, what running a business is or what an adventure in the nature of trade is has been well established legally for decades now and for decades before the TFSA scheme was enacted in 2008:

[42] The Act does not provide a general definition of a “business” but does include specific activities in the extended non-exhaustive definition of “business” in subsection 248(1). In particular, subsection 248(1) extends the meaning of “business” to include a profession, calling, trade, manufacture or undertaking of any kind whatever and an adventure or concern in the nature of trade. The traditional common law definition of the term “business” is “anything that occupies the time and attention and labour of a man for the purpose of profit”. [31] No single factor is determinative. The quintessential characteristics of business are activity, enterprise, entrepreneurship, commercial risk and the pursuit of profit.

[43] The verb “carries on”, in the phrase “carries on one or more business” in subsection 146.2(6), implies a level of activity. When Parliament passed section 146.2 of the TFSA legislation in 2008, it was already well-established that a taxpayer could carry on business by trading in securities, which would give rise to income from business. The established legal principles applicable to determining whether a taxpayer carries on business by trading in securities that gives rise to business income were entrenched in the jurisprudence by 2008. Indeed, by 1981, the case law was so clear that a taxpayer’s transactions in securities could amount to carrying on business that the Department of National Revenue (the CRA’s predecessor) issued Interpretation Bulletin IT-479R. Interpretation Bulletin IT-479R correctly states that depending on the taxpayer’s entire course of conduct, transactions in securities could amount to carrying on business, any proceeds from which would be taxable on income account. In 1993, the Federal Court of Appeal in Vancouver Art Metal Works Ltd. emphasized that it is a question of fact whether trading securities amounted to carrying on a business and set out certain factors relevant to such a determination. [32] Those factors included the frequency of transactions, the duration of holdings, the intention to acquire for resale at a profit, the nature and quantity of the securities held, or the subject matter of the transaction, and the time spent on the activity.

[44] Parliament is presumed to know the legal context in which it legislates. [33] But even ignoring the presumption, given the overwhelming jurisprudence, it is inconceivable that Parliament was not aware that trading in securities could amount to the carrying on of a business when it passed the TFSA legislation in 2008.

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