The Tax-Free Savings Account (TFSA) is intended to be a savings vehicle for Canadians to earn investment income. You can invest a substantial amount of money in your TFSA, and the balance can accumulate quickly in a TFSA as the money growth, and all interest, gains, or dividends inside the account, are tax-free. Eligibility for a TFSA account begins at age 18, and TFSAs began in 2009. The allowed contribution was originally $5,000 per year, and is now 6,000 per year.
However, the benefit of tax-free gains be lost if the CRA determines that you are using your TFSA to gain business income, as opposed to investment income. If you day trade in your TFSA, the CRA may determine that your profits from buying and selling stocks are actually fully taxable as regular income.
The CRA looks at different factors to determine whether something is business income:
- Frequency of transactions;
- Duration of holdings;
- The intention to acquire securities for resale at a profit;
- Nature and quantity of the securities;
- Quantity of securities; and
- Time spent on the activity.
It should be noted that the line between owning stocks as investments, and carrying on business as a trader, is not always clear. But if you are trading everyday and holding the stocks for just a few days, it is likely that you will be considered to be carrying on business.
The CRA has recently been looking closely at TFSA accounts that are high in value, to determine whether trading activity in these accounts should be considered carrying on a business of trading. The CRA has disclosed that as of December 31, 2018, it had assessed approximately $114 million in taxes resulting from its audits of TFSAs between 2009 and 2017, some of which is related to their determination that the TFSA accounts have been used to carry on a business.
This article is a general discussion of certain tax and accounting matters and should not be relied upon as tax or accounting advice. If you require tax or accounting advice, we would be pleased to discuss the issues in this article with you.
