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January 07, 2015
CRA cracks down on high earning TFSAs

The Canada Revenue Agency (CRA) appears to be targeting individuals who earn too much money in their tax-free savings accounts (TFSAs).

The accounts were established by the federal government in 2009 to encourage people to save more for retirement.  TFSAs allow individuals age 18 and older to direct up to $5,500 annually to the plans. This is an increase from the annual contribution limit of $5,000 for 2009 through 2012.

Under TFSA rules, money can be contributed to any investment vehicle and withdrawn later on a tax-free basis.  

The problem for the CRA:  some TFSA owners are making too much money.

According to reports published in the December 3, 2014 edition of the National Post, the government’s tax agency is cracking down on those who have used TFSAs to establish self-directed investment brokerage accounts and have profited from the sharp rise in equity markets since 2009.

The reports suggest that extensive trading through a TFSA account could trigger a CRA audit.  To the CRA, frequent trading indicates that the accounts are being used for business purposes rather than as savings vehicles.  And business earnings are subject to taxation.

“There are many people, day traders, with online brokerage accounts that buy and sell securities.  Maybe 10 or 15 times a day.  The CRA says that means you are a trader in securities and carrying on a business,” warns Calgary lawyer Tim Clarke.  “They assume that since the maximum contribution you could make up to 2013 was $31,000, if you’ve got $10 million in the account, you’ve done something wrong.”

On the contrary, investors are simply reaping the benefits of investing in higher risk securities that also have the potential to generate higher returns, Mr. Clarke asserts.  Through his firm, Moodys Gartner Tax Law, LLP, the Calgary lawyer plans to challenge the CRA’s interpretation.

There are no clear rules on how many security trades can be conducted within a tax-free savings account or on how much return on investment a plan holder can earn without triggering a tax liability.

To illustrate the issue, the National Post cites a case in which a Quebec resident earned $180,000 by making 200 trades within his TFSA account.  Called a “pirate” by a CRA auditor, he is now facing a $35,000 federal tax liability as well as an additional tax levy from the province.  He made his money by investing in high risk resource securities.  He is neither a licensed stock broker nor a professional trader.

If CRA audits of tax-free savings account returns continue, it is likely that set rules on TFSA investment practices and/or returns will be established, either through legislation or case law.

More information will be provided as it becomes available.

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