Length – 4:20

TFSAs – Heavy Trading Dangers?

Jamie Golombek
Managing Director, Tax & Estate Planning
CIBC Wealth Strategies
“Over the summer TFSAs have sought headlines in many of the newspapers and the media because the CRA has announced that they are auditing and looking to reclaim 75 million dollars from people's abuse in the TFSA. Yet I believe that the average Canadian need not worry at all about the TFSA.”

When does trading in a TFSA become a business?
“So the main focus of the recent attention on TFSA was comments made by the CRA at a roundtable discussion at the step conference in June. And this is June 2017. And what they said at this conference was they were asked specifically if they would outline - when does trading, active trading inside a TFSA become a business and therefore subject to penalty tax. Because you’re not allowed to operate a business inside your TFSA. And the CRA refused to give any guidance as to the amount of trading activity that would constitute a business saying well we all know income versus capital. The classic issues are relevant whether it's in a TFSA or not. So what are they talking about what's going on here. There are a limited number of people, estimates about maybe 20 percent of the $75 million dollars that have been subject to penalty for running a business out of their TFSA and that business is day trading. So in other words they are buying and selling stocks very frequently sometimes same day next day holding very short periods of time buying stocks that don't pay any dividends. And these are often done by professional traders and people in the securities industry and they're accumulating TFSAs well into the six figures. We've even heard of seven figure TFSAs and the CRA is concerned about this. But the average person who's doing normal investing in a TFSA, even if they're trading every week really need to be concerned. The CRA is looking at a number of factors. Frequency of transactions, duration of hold periods, the type of investments, whether the investor is professional, do they spend most of their daytime in the securities industry? All those factors are being considered before they issue an assessment of business income in a TFSA.”

Importance of TFSA contribution rules
“I think the majority of problems that people run into with TFSAs is a misunderstanding of the contribution rules. So the generals as we all know as you can put in $5,500 a year, there's a cumulative total over around $52,000. If you over contribute to a TFSA the penalty is 1 percent per month. And I think that is where most of the 75 million dollars of penalties have come from because effectively if you put money in a TFSA at institution A then you withdraw it and walk across the street and put it into a TFSA with Institution B. That is a withdrawal and a re-contribution in the same year that could give rise to over contribution tax because it wasn't done via a direct transfer. If you want to move your TFSA from Institution A to B you must do it via a direct transfer which is not recorded as a withdrawal and a contribution because the rules for a TFSA say, that any amount withdrawn from a TFSA can be re-contributed including all the income and growth, beginning the following calendar year. So if you do it the same year you could be caught. And that's why it's important that if you are transferring between one institution and another, it's done as a direct transfer.”

Use TFSAs responsibly
“So for the average person, I don’t think they need to worry at all about those headlines that we saw over the summer. People need to use TFSAs responsibly. They are a great source of tax savings and retirement savings. Really anything savings for particularly people in lower tax brackets. If someone is in a low bracket now, and they're going to be in a high bracket later TFSA beat RRSPs. But for the majority of Canadians I would say, that if you're in a high bracket when you're working and you're going to be in a lower bracket when you retire, I’d first stick to my RRSP and only then use my TFSA.”