A recent BMO survey revealed that Canadians contributed about $1000 less to their TFSAs in 2016 than they did the year before. The reason? They simply couldn’t afford to save as much – 43% said they didn’t have enough money, while 36% needed the money for other things. About 15% of the people polled didn’t contribute to their TFSA at all.
The amount a taxpayer can contribute per year is limited. In 2015, the limit was $10,000, but in 2016 it was only $5,500. However, the unused portion is carried over, so you can go over the annual limit if you didn’t max out in previous years.
Average amounts contributed:
Atlantic Provinces: $4312
Quebec: $4168
Ontario: $4771
Manitoba and Saskatchewan: $3220
Alberta: $3849
British Columbia: $5898
Overall Canadian average: $4592
Participants stated they expect to contribute even less this year. But that doesn’t mean TFSAs are losing their attraction. According to StatsCan, TFSAs are becoming more popular than RRSPs.
Tax-free savings accounts were introduced in 2009. These accounts allow you to save money, without paying any tax on the interest you earn or when the money is withdrawn. However, if your TFSA carries on a business, according to subsection 146.2(6) of Canada’s Income Tax Act, the income earned is taxable.
Individuals amassing huge balances in their tax-free savings accounts, without going over the contribution limit, has prompted aggressive auditing. The Canada Revenue Agency claims to have already uncovered over $75 million in unpaid taxes from improper use of TFSA funds. Of this money, the CRA says 20% is from TFSAs being operated as a business.
When auditing a TFSA, the Canada Revenue Agency first determines whether the account is carrying on a business. Several factors are considered based on case histories of selling securities. The big question is whether losses and gains should be on an income account or a capital account.
These factors may indicate your TFSA is carrying on a business:
Many people wonder if Parliament is heading towards banning frequent securities trading within a TFSA. The Income Tax Act explicitly states business income generated with TFSA funds is taxable, however, this caveat apparently ensures taxable businesses that they don’t need to compete with tax-exempt TFSAs.
Also, publicly traded securities are a permissible form of investment and the contribution limit formula used for TFSAs seems to allow somewhat frequent transactions.
The CRA will occasionally do a random audit, but there are a few things that grab their attention and almost guarantee you will be audited. These include:
The CRA audited or examined 144,013 accounts during the past fiscal year. No criminal charges were laid in most of these cases, however close scrutiny from the tax department can still be a daunting experience.
Some taxpayers were found guilty. An examination of the account of a certified financial analyst revealed several large transactions and a total gain of about $550,000. In the end, the judge held the taxpayer’s profits to be 100% taxable as business income.
The methodology used by the CRA is not limited to professional traders. Although they seem to be more likely targets, amateur investors with frequent-trading strategies generating huge profits could also find themselves under investigation.