December 3, 2014
Tax Free Savings Account (TFSA) vs Tax Free Trading Account (Doesn't Exist in Canada)
Recently in the news the Canada Revenue Agency (CRA) has been targeting those Canadians that have had large returns within the Tax Free Savings Account (TFSA). As an example, say that you have put in the maximum of $31,000 (2014 cummulative amount allowed) into your TFSA over the last six years, and are now above say, $100,000 in value today then you would be receiving some CRA attention. This does suggest that those with excellent returns over the last 6 years are being watched by Canada Revenue Agency. Thus, being successful may get you looked at.
So who is CRA targeting?
Firstly, day traders with more than 10-15 trades per day are part of the group being looked at by CRA.
Secondly, those that have placed private company stock into a TFSA in which they have less than 10% ownership interest ( which is owned by directly or indirectly by the contributor). The reason these individuals are being looked at are that they may not have valued the stock properly when contributed to the TFSA and have intentially undervalued the company at the time of contributon in order to inflate the returns within the TFSA. This is subjective on what a penny stock is worth or not and alot of Tuesday morning quarterbacking maybe here on this issue by CRA if the valuations are not complete.
Thirdly, one can't put in privately held stock into a TFSA if your overall ownership interest is 10% or more (either directly or indirectly) and is known as a Prohibited Investment. Therefore, anyone having done these types of private company stock contributions is being looked at to see if they complied with the rules, which makes sense from an enforcement point of view.
A Prohibited investment – an investment to which the TFSA holder is closely connected. It includes:■ a debt of the holder;■ a debt or equity investment in an entity in which theholder has a significant interest (generally a 10% orgreater interest, taking into account non-arm’s lengthholdings); and■ a debt or equity investment in an entity with which theholder does not deal at arm’s length.
To conclude, if you are holding items such as stock for months at a time, are not making day trades, and do not have any Prohibative Investments then you should be fine in your TFSA would be my view.
However, if your account should have been called a Tax Free Trading Account (which doesn't exist) then income taxes may result to you from excessive stock trading. This is very subjective issue when you are considered to operate a business of day trading or just investing. If Canada Revenue Agency comes calling then please contact me and I can provide a legal referral.
I have attached the TFSA Rules for your reference. (Click here)
Also, Investment Industry Association of Canada has submitted to the various Federal Departments involved on this topic on July 3, 2014 in the pdf link and is definately worth reading. (Click here).
Let us hope that Tax Free Savings Account (TFSA) remains as a truly tax free account. If you have any questions or comments, please feel free to contact Peter at 905-898-3355.
Notice to Reader- Warning and Disclaimer
This monthly update was prepared on December 3, 2014.
As Tax Court decisions, budgets, and legislation changes over time it will require that the information contained above may require modification. Therefore, when considering any of ideas from this article, please contact the writer directly before acting on them. This will ensure that any information has been updated to current laws and regulations.
Without contacting the writer before implementing any of these items you will bear all the responsibility for any tax assessments that may result from this information as it may be dated.