The ruling opens the door to hefty tax bills for other frequent investors
A British Columbia judge has ruled that an investor who was day trading stocks in his tax-free savings account must pay tax on the income, opening the door to hefty tax bills for other frequent investors.
Fareed Ahamed, a licensed investment adviser and the plaintiff in the case, argued that because the Canada Revenue Agency exempts business income from day trading when it is done in a registered retirement savings plan, it should also exempt business income accumulated inside a TFSA.“Parliament could have adopted, but chose not to adopt, the same statutory approach for TFSAs as it did for RRSPs and RRIFs,” Justice Shapiro wrote in his decision.
He filed the case in 2015 after the CRA began auditing a number of tax-free savings accounts. Between 2009 and 2017, the agency assessed approximately $114-million in taxes from those audits, with about 10 per cent from TFSA accounts that were seen as carrying on a business – such as day trading, which can generate hefty returns through aggressive securities trading.
By 2012, the total value of the account had dropped to $564,482.90. Mr. Ahamed sold the securities and transferred the majority of the funds out of the TFSA. The CRA reassessed his tax owing for 2009 through 2012. Jamie Golombek, the managing director of tax and estate planning with CIBC Private Wealth Management, says it is no longer unusual to see six-figure balances in TFSAs – and while it may be a red flag for the CRA, the average investor need not worry.
While the TFSA trust occupied Mr. Ahamed’s time, attention and labour, Mr. Clarke acknowledged, it did not meet a number of the CRA tests, he argued, and the court should have found that the TFSA did not carry on a business.
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