Can Your Tax-Free Savings Account Be Too Profitable?


TFSA tax account cra

The Harper government created Tax-Free Savings Account (TFSA) to help shield our savings from tax, but now Canada Revenue Agency (CRA) auditors are targeting TFSA holders with large sums of money in their accounts.

According to a recent article in The National Post, if you’ve posted not only large gains in your account, but if you also trade too frequently, you could be audited. As a justification for this, the CRA argues that those who trade a lot on their TFSA and get big gains by doing that, are actually running a trading business and should be taxed on that income.

Obviously, the investment community has something to say about this. The Investment Industry Association of Canada charged that the CRA provides “insufficient guidelines” to the TFSA account holder as to whether they are truly breaking tax rules and sent them a letter to that effect.

The heat is on for the CRA from the legal system as well. A Calgary law firm is preparing to fight them when it comes to their interpretation of “business.” It’s also unknown what balance of activity in your TFSA will actually trigger an audit. The CRA would not comment when The National Post asked the question. Apparently, the CRA is hanging on a rule that prevents Canadians from using their TFSAs to “conduct a business,” but the Calgary law firm that is taking them on is arguing that this rule is vague.

Tim Clarke of Moodys Gartner Tax Law LLP told The Financial Post that the CRA seems to be equating hobbyist day traders, that maybe make 10 to 15 trades a day, to carrying on a business. In the past, the CRA went after TFSA account holders who were undervaluing shares in their account and few people argued, but going after account holders who just happen to be active and successful investors is a new and, some say, overzealous approach. 

In their detailed letter to the CRA’s financial director, the Investment Industry Association of Canada not only asked for clear-cut rules around this issue, but also that TFSA trustees found to have been using their TFSA to “carry on a business” would not be held liable if they withdraw their TFSA funds before their tax bill arrives.

Those TFSA holders found to be too profitable by the CRA have been told that they will not face further penalty if they agree to pay tax on the income within the account. One such person, speaking anonymously to The Financial Post said if he did not pay the higher tax, he would face wage garnishment and interest penalties. He has since paid the tax and taken the $180,000 he acquired through 200 trades out of his TFSA.

He was able to make those trades only because of what he says is some familiarity with resource stocks and although he is a financial advisor, he is not authorized to make trades for clients and has never taken courses on trading. “You know what? I think they’re jealous,” he told the paper after mentioning that the first thing that flagged the auditor’s attention was the amount in the account.

For his part, Tim Clarke believes, “If you put a qualified investment into a TFSA, as long as it’s within the categories of qualified investment, it shouldn’t matter how you earn or lose money. The income should not be taxable and the losses not deducted.”

LSM Insurance asked some of our friends in the financial industry what they thought about some TFSA being audited by the CRA on Twitter and below is just as a sample of what they came back to us with:

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  • LSM Insurance
    January 7, 2018 at 7:12 am

    I am in 100% agreement with you Ami.

    In fact I think the name of the Vehocle should in fact be changed to “Tax Free Savings Accounts If Certain Conditions Are Met.” A mouthful I know 🙂 The biggest problem I have with it is the ambiguity there is no spefiific rules to what violates the tax free eligingility.

    IMO it should be clearly stated you are allowed to make this many trades per yearor allowd this percentage of gains.

  • Ami Maishlish
    January 6, 2018 at 11:05 pm

    By the same “logic” next will be a tax on lottery winners who buy too many tickets and end up winning against the high odds or gamblers who sit at the casinos for hours pulling on the one-armed bandit. However, also by the same “logic” chronic gamblers should be able to write off their losses. Ditto for frequent traders who lose on their trades within the TFSA and/or RRSP. Hole-ly Pandora’s box lid! Sounds to me like another swing by Junior T and his tax twin against the middle class and working Canadians.