Canadian tax courts are cracking down on TFSA day trading, taking aim at investors that are doing so well that their trades could be classified as a business activity… well, kind of.
What happened: The defendant in question is Fareed Ahamed, an investment advisor who grew $15,000 in his tax-free savings account to over $617,000 from 2009-2011. Canada’s tax court ruled he was carrying out a business in his TFSA, and his income would be taxed.
- A TFSA allows Canadian adults to contribute $6,500 a year and earn tax-free investment income on investments, including stocks, bonds, ETFs, and mutual funds.
- However, investors are required to pay tax “if the income is earned from a business or from non-qualified investments in the account,” per The Globe and Mail.
Why it matters: Beyond likely making Ahamed the most in-demand financial advisor in the country right now—despite his soft spot for volatile penny stocks—the ruling opens the door to tax other highly active investors (those who simply have large balances needn’t worry).
- Ahmad’s lawyer argued that the exemption on business income from day trading in a registered retirement savings plan (RRSP) should be extended to a TFSA.
- He also claimed the CRA’s current test for assessing whether a TSFA is carrying out business activities should be thrown out for being stacked against the taxpayer.
Zoom out: Between 2009 and 2017, the CRA assessed ~$14 million in taxes from investors classified like Ahamed. Given that day trading joined sourdough making and finger painting as a hobby du jour of the pandemic era, the tax agency might soon be in for a windfall.—SB