Careful how you trade in your Tax-Free Savings Account (TFSA), or you could end up with the Canada Revenue Agency (CRA) issuing you a hefty and surprising tax bill.
What’s new: A Tax Court of Canada judge just ruled that a licensed investment advisor owes tax on the income he generated through day trading with his TFSA, which grew from $15,000 to over $600,000 in three years, per the Globe and Mail.
- The judge found that the plaintiff had traded frequently enough in speculative securities to make the account effectively a business, making the tax-free element of the account void.
Why it matters: Exactly when a TFSA turns from a personal account into a “business” is murky—there are no clear rules about how much money you can make from investments in the account, or how much you can trade stocks.
But there are guidelines to help distinguish between personal investments and business activity—the easiest way to avoid the tax man is to keep investments in your TFSA passive, per TaxPage.
Keep transactions low and buy into shares you’re happy to hold. Too many transactions and too short holding times could be a red flag for the CRA.
Stay away from speculative shares. Buying a lot of penny stocks or options could qualify as business activity.
Step back from your screen. If you’re spending a significant amount of time researching investments and trading, the CRA could say you’re operating as a business.
- Foreign currency trading, options writing and excessive stock trading can also render the income from these activities taxable within a TFSA.
Bottom line: If you’ve got six figures sitting in your TFSA, you don’t necessarily need to worry. It’s not about the balance in your account, but how you got it.