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Launched in 2009, Tax-Free
Savings Accounts (TFSAs) have
been billed as the mirror image
of Registered Retirement Savings Plans (RRSPs). The money
was taxed before it went into the
TFSA, but any earnings inside
the TFSA were tax-free. Recently, the Canada Revenue Agency
(CRA) has been cracking down
on those who have been earning sizeable profits in their TFSA
through making multiple stock
trades, and charging taxes on
these profits. While this might
not apply to most Canadians investing their TFSA dollars into
GICs or mutual funds, we decided to Ask an Expert to give us
the lowdown on what the CRA is
up to. – Hennig
by Tim Clarke & Lauchlin MacEachern
Moodys Gartner Tax Law LLP:
M
any Canadians
believe amounts
earned in their
tax-free savings accounts
are just that, tax-free. Alas,
our tax laws are not so simple. Since TFSAs were introduced in 2009, the federal government has enacted
a number of amendments
subjecting TFSAs to tax and
penalties in circumstances
it considers inappropriate.
Now another exception (as
interpreted by the Canada
Revenue Agency) to the taxfree status of a TFSA is making headlines: trading securities in a TFSA.
Under a recent taxpayer
audit project, the CRA now
takes the position that where
a TFSA has bought and
sold securities in a manner
it considers to be a trading
Ask
AN EXPERT!
business, then the income and gains
are subject to income tax, potential
penalties, and daily compound interest.
Whether a taxpayer is carrying
on a business of trading securities
has been litigated for decades because it is a “grey area” of the tax
law involving the consideration of a
variety of factors including the number and frequency of trades, the relationship of the TFSA beneficiary’s
regular occupation to the securities
industry, the time spent undertaking securities transactions compared
to other business or employment activities, and a host of others, with no
single factor being determinative.
Consequently, Canadians who have
increased the value of their TFSA
by actively buying and selling securities now face considerable uncertainty as to whether those gains
are actually tax-free. If assessed, the
onus is on the taxpayer to prove that
the CRA is incorrect.
Both the United States and the
United Kingdom have their own
versions of the TFSA, the Roth Individual Retirement Account (IRA)
and the Individual Savings Account
(ISA), respectively. Both are subject
to restrictions similar to TFSAs in
that they tax income earned from either an “unrelated business” (Roth
IRA) or carrying on a business (ISA).
But neither the US nor the UK tax
authorities consider trading in securities to put IRAs or ISAs offside.
The CRA’s position is unique in tax
law and appears to defeat the purpose of the TFSA – as a vehicle to
save for retirement.
The uncertainty arising from the
CRA’s TFSA audit project results
from a dearth of clear guidance as to
what the CRA considers “carrying
on one or more businesses” within a
TFSA. In our view, a simple bright-
line test should be applied: any income or gain from a qualified investment in a TFSA should be taxfree whether the gains result from a single trade
or an actively traded
portfolio.
Whether or not the federal government clarifies
its policy on TFSAs trading
in securities, this issue appears destined for the Tax
Court of Canada. In the
meantime, Canadians who
have earned significant
amounts in their TFSAs
will have to live with the
uncertainty as to whether those gains are truly taxfree. t
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