In the recent case of Canadian Western Trust Company as Trustee of the Fareed Ahamed TFSA v. The King ,the Tax Court of Canada ruled that income earned inside a Tax Free Savings Account (“TFSA”) from carrying on a business of trading in investments is taxable.
Click here to read the full Tax Court Judgement
The Appellant in the case was a day trader who bought and sold securities inside his TFSA and made substantial profits. Between 2009 and 2011 he contributed $5,000.00 each year to his TFSA and invested mainly in penny stocks in the mining sector on the TSX Venture Exchange. At the end of 2011, the total value of the TFSA was $617,371.24. The CRA reassessed the Appellant for the tax years 2009, 2020, 2011, and 2012, on the basis that the profits were business income. The court agreed.
The court relied on the wording in subsection 146.2(6) of the Income Tax Act in ruling that unlike an RRSP, income from carrying on business inside a TFSA is taxable. Subsection 146.2(6) states:
“No tax is payable under this Part by a trust that is governed by a TFSA on its taxable income for a taxation year, except that, if at any time in the taxation year, it carries on one or more businesses, … tax is payable under this Part by the trust …”
The court then concluded that the Appellant was carrying on the business of trading in qualified investments and upheld the reassessments. In coming to that conclusion, the court considered several factors including: Mr. Ahamed was a professional investment advisor with knowledge and expertise in the securities market, that he traded frequently, that he had an excessive history of buying and selling shares and holding them for short periods of time, and that he spent considerable time in researching securities markets.
This is an important case for those who generate income in their TFSA through trading activities.If you or someone you know carries on similar trading activities and you have not reported your income on your tax return, then you may want to consider making a voluntary disclosure application with a view to getting a waiver or cancellation of interest and penalties for not reporting. But you have to do that BEFORE the CRA contacts you.