When the Tax-Free Savings Account (TFSA) is Not Actually Free
The Cautionary Tale of Canadian Western Trust Company v The King.
The TFSA is among one of Canadians favourite Registered Accounts for its Tax-Free treatment on the disposition or accrued interest of typically held investments like Stocks, Bonds and GIC’s. However, many Canadians may not be aware of the CRA’s ability to reassess your transactions, even many years back and determine that you were running a business inside your TFSA. This determination would negate the transactions Tax-Free treatment and potentially leave you with a rather large and unexpected tax bill.
Canadian Western Trust Company v The King, 2023 TCC 17 is a recent case that provides further confirmation on how “carrying on a business” per section 146.2(6) of the Income Tax Act is to be determined. The Tax Court of Canada uses a test with various elements to assist the court in determining whether securities transactions are on account of income or capital. This distinction leads to the determination of whether the income is classified as business income or not .
Mr. Ahamed who was an investment advisor from Vancouver, open a self-directed TFSA in trust and directed all the purchases and sales of securities . The majority of the shares were penny stocks listed on the TSX Venture Exchange, specifically in the Junior Mining sector and held for a short period of time . As previously mentioned, the test for “Carrying on a Business” includes inquiries into the Frequency of Transactions and Period of Ownership among other factors.
Possible Application to Regular Canadians
Thanks to a combination of the Pandemic, unpredictable global and domestic economic outlook, and the rise of retail trading platforms such as Wealth Simple, Quest Trade, Easy Trade etc. Canadians may have either become more active traders or entirely new traders as either a past-time or side hustle, commonly referred to as “day-trading”. Canadian Western Trust Company v The King should serve as a cautionary tale that the benefits and tax protection of the TFSA can be eliminated if the Minister (Canada Revenue Agency) thinks you’re running a business within your TFSA. Then as in the case of Mr. Ahamed, any gains from your transactions will lose their Tax-Free treatment and you now have created taxable business income.
Savvy Canadians, who have spent years contributing to their TFSA’s and who now have amassed considerable wealth either through diligent investing or lengthy compounded interest should have nothing to fear.
If you have any questions or concerns about the tax implications of your Transactions feel free to book an appointment on our website for more information.
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions, you should consult a lawyer.