Risk of Taxes from Tax Free Savings Accounts?

So you have a Tax Free Saving Account (“TFSA”) with a bit of capital in it, and you are a savvy investor, so you are earning a bit of income in the account.  You are free and clear of any tax implications right?  Wrong.  In April of this year Justice Boyle’s decision in Foote v. HMTQ [1] set some limits on what is and what is not tax free within a TFSA.  Andrew Foote had been doing some serious stock trading in his free time in 2009 and reported the 23% gain as a capital gain (thereby only exposing 50% of the gain to tax).  However upon a thorough review of the facts, Justice Boyle found that Foote was trading in securities as a business activity, and therefore 100% of the gain was liable to taxation.

The CRA agrees and has been regularly auditing TFSAs looking for evidence of business activity.  Specifically the CRA has been looking for the frequency of transactions within the account, the intention to acquire an asset (such as a security) for sale at a later date, at a profit, the nature and quality of the asset, and the time spent on the pursuit.  As an article in the Financial Post stated today, “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” [2].

So if you are investing in stocks, or dabbling in mutual funds, or day trading currency, do not assume that since you are doing it within the confines of your “tax free” savings account that it will actually be tax free.  Whether what you are doing constitutes business activity or not will be judged not what it is called, but what it actually is. 

If it looks like a duck, walks like a duck, and quacks like a duck, the CRA is going to deem it to be a duck, regardless of whether you call it a cat.

[1] Foote v. HMTQ, 2017 TCC 61.

[2] http://business.financialpost.com/personal-finance/stop-using-your-tfsa-to-frequently-trade-stocks-the-cra-may-see-it-as-business-income/wcm/81e56526-d089-4321-833c-8730b06ccd5c

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