Advisor learns the hard way that TFSAs are not for frequent trading

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If the Canada Revenue Agency sees frequent trading activity in a TFSA, it could argue that your client is running an active trading business, thus subjecting the TFSA to tax on its income and gains. That’s exactly what happened in a recent Tax Court decision.

The case, decided in February, involved a Vancouver-based investment advisor who opened his first TFSA on Jan. 2, 2009. It was self-directed, and all securities purchased and sold were “qualified investments” under the Income Tax Act.

Most of the taxpayer’s TFSA investments were non-dividend paying and speculative in nature, with the majority being penny stocks in the junior mining sector listed on the TSX Venture Exchange. The taxpayer’s TFSA owned most of the shares for brief periods.

The taxpayer contributed the maximum allowable contributions of $5,000 to his TFSA in early January 2009, 2010 and 2011. By Dec. 31, 2011, his TFSA had grown to a fair market value of $617,371. In January 2013, he liquidated the securities in his TFSA and transferred nearly $547,800 to himself on a tax-free basis.

The CRA reassessed the taxpayer’s TFSA for each of the 2009, 2010, 2011 and 2012 taxation years. The agency claimed the TFSA was carrying on a business of trading qualified investments and that its income from each of those years was therefore subject to income tax. The tax assessed was based on taxable income of $44,270 in 2009, $180,190 in 2010, $330,994 in 2011 and $14,027 in 2012.

When determining whether a taxpayer’s gains from securities constitute carrying on a business, the CRA considers a variety of factors, which include: the frequency of the transactions; the duration of the holdings; the intention to acquire the securities for resale at a profit; the nature and quantity of the securities; and the time spent on the activity. According to the judge, there was no doubt that, based on the taxpayer’s TFSA trading activity, the taxpayer was indeed conducting a business of active trading in his TFSA.

The consequence of doing so is clearly spelled out in the Income Tax Act, which states that a TFSA is generally exempt from tax on its income, subject to two exceptions: holding non-qualified investments or carrying on a business.

This rule is in direct contrast to the rules governing active trading in an RRSP or RRIF. When it comes to these registered plans, the Income Tax Act exempts both RRSPs and RRIFs from paying tax on business income when that income is derived from investing in qualified investments.

The crux of the taxpayer’s argument was that the rule exempting an RRSP from paying tax on business income from day-trading of qualified investments ought to be applied to a TFSA. He argued that “there could have been no legislative purpose for making a TFSA […] taxable on the income from carrying on a business of trading qualified investments when an RRSP carrying on the very same business is not taxable.”

In responding to this argument, the judge noted the government made a deliberate choice. “Had Parliament also intended to exempt from tax a TFSA’s income from carrying on a particular type of business — trading qualified investments — Parliament would have legislated accordingly, just as it had for RRSPs,” he wrote.

The judge concluded the taxpayer — a professional investor with deep knowledge and experience in the securities market, who traded frequently in shares that were mostly speculative in nature and held for short periods — was carrying on a business of trading in his TFSA. As a result, the TFSA was found to be taxable on its income.

Jamie Golombek, CPA, CA, CFP, CLU, TEP is the Managing Director, Tax & Estate Planning with CIBC Private Wealth in Toronto. Jamie.Golombek@cibc.com

Editor’s note: The advisor has appealed the decision to the Federal Court of Appeal.

Jamie Golombek

Tax & Estate

Managing Director, Tax and Estate Planning, CIBC Private Wealth Team Jamie Golombek is Managing Director, Tax and Estate Planning with CIBC in Toronto. As a member of the CIBC Private Wealth team, Jamie works closely with advisors from across CIBC to support their clients and deliver integrated financial planning and strong advisory solutions. He joined the firm in 2008 after 12 years with a global investment company, where he was involved in both internal and external consulting on all areas of taxation and estate planning. Jamie has also worked for Deloitte as a tax specialist in the Toronto office, where he specialized in both personal and corporate tax planning. Jamie is quoted frequently in the national media as an expert on taxation. He writes a weekly column called “Tax Expert,” in the National Post, has appeared as a guest on BNN, CTV News, and The National, and for several years was a regular personal finance guest on The Marilyn Denis Show. He received his B.Com. from McGill University, earned his CPA designation in Ontario and qualified as a US CPA in Illinois. He has also obtained his Certified Financial Planning (CFP) and Chartered Life Underwriting (CLU) designations. In 2023, Jamie was named a CPA Ontario Fellow. The FCPA is the highest distinction that can be bestowed upon a CPA who brings distinction to themselves and to their profession through leadership and achievement in their professional, community or personal lives. Jamie is a past chair of the Investment Funds Institute of Canada’s Tax Working Group. He is also a member of CPA Ontario, the Illinois CPA Society, the Estate Planning Council of Toronto, the Canadian Tax Foundation and the Society of Trust and Estate Practitioners. For nearly two decades, Jamie taught an MBA course in Personal Finance at the Schulich School of Business at York University in Toronto.