If you or your clients are actively trading in a TFSA, you may be surprised to learn that this trading activity could constitute a business, depending on the particular circumstances, and the TFSA could be subject to taxes on business income.
This has been a focus of recent audit and reassessment activities in which the Canada Revenue Agency (CRA) has been targeting taxpayers who actively traded securities in their TFSAs. The CRA was asked to provide an update on the result of these audits and whether it has any plans to educate the public on what the acceptable limits are on securities trading to prevent a TFSA account from being considered to be "carrying on a business" at the Society of Trust and Estate Practitioners' annual conference in Toronto in June.
The CRA stated that, to date, "millions of additional taxes have been recovered as a result of audits of TFSAs." The CRA referred to a recently released Income Tax Folio, which indicates that "the determination as to whether a particular taxpayer carries on a particular business is a question of fact that can only be determined following a review of the taxpayer's particular circumstances."
Read: CRA raises more than $75 million from audited TFSAs
The CRA then quoted its Interpretation Bulletin, entitled Transactions in Securities, which sets out factors developed by the courts that are relevant in determining whether transactions in securities constitute carrying on a business. It concludes that "as there is nothing unique about TFSAs in the context of securities trading, there is no plan to provide any additional guidance specific to TFSAs."
So, what are the factors that must be taken into account when determining whether a taxpayer's gains from securities constitute carrying on a business? The factors that the CRA looks at include: the frequency of the transactions; the duration of the holdings; the intention to acquire the securities for resale at a profit; the nature and quantity of the securities; and the time spent on the activity.
Although most of our clients likely need not worry about being reassessed on their TFSA trading, the risk may somewhat higher for some financial advisors who may have used their TFSA as a platform for frequent day trading.
This then leads to the question: What about active trading in an RRSP or RRIF? This trading poses less of a risk; that's because even though RRSPs and RRIFs are taxable on income from carrying on a business, there is a specific exclusion for income and gains earned from qualified investments. The CRA states the following in Folio 10 Registered Plans for Individuals: "…if an RRSP or RRIF were to engage in the business of day trading of various securities, it would not be taxable on the income derived from that business provided that the trading activities were limited to the buying and selling of qualified investments."
The following are common types of qualified investments:
> money, guaranteed investment certificates and other deposits
> most securities listed on a designated stock exchange, such as shares of corporations, warrants and options, and units of ETFs and real estate investment trusts;
> mutual funds and segregated funds;
> Canada Savings Bonds and provincial savings bonds;
> debt obligations of a corporation listed on a designated stock exchange;
> debt obligations that have an investment-grade rating; and
> insured mortgages.
The most common types of property that constitute a qualified investment are discussed in CRA's publication: Folio S3-F10-C1, Qualified Investments — RRSPs, RESPs, RRIFs, RDSPs and TFSAs.