A good starting point is to look at CRA’s
Folios S3-F10-C1 and
C2, which explain prohibited and qualifying investments for registered
accounts, albeit poorly. Borrowing and business transactions are generally
taboo in most registered plans. However, you will learn in these documents
that TFSA accounts will not be offside for certain business transactions,
i.e., if investors acquire and hold an interest in a limited partnership.
Tax treatment of RRSP/RRIF business income
If you are reading closely, you will note that this exception is not
extended to RRSPs or RRIFs – at least not at first glance. You’ll have to
look further, to a different section of the Income Tax Act,
notably paragraphs 146(4)(b) and 146.3(3)(e), to calculate the amount of
business income that is taxable to the RRSP or RRIF. After much complex
language, you will see that for RRSP and RRIF purposes, any business income
derived from the holding or the disposition of qualified investments, is
excluded from tax, as is income from limited partnerships.
The CRA Folio goes on to address day trading, saying that if “an RRSP or
RRIF were to engage in the business of day trading of various securities,
it would not be taxable on the income derived from that business
provided that the trading activities were limited to the buying and selling
of qualified investments.”
Based on this, an investor could reasonably believe the only way that day
trading would be considered a business for the purposes of an RRSP or RRIF
is if the trading is not in qualified investments. It should also follow
then, that these same rules should apply to any registered plan, including
But, as we know, the CRA does not seem to be assessing in this way. Is
there any logic to the reclassification of income in these audits? Perhaps
there is, when we think about what eventually happens with the earnings in
these plans. The income in an RRSP or RRIF is going to be 100% taxed on
withdrawal, similar to business income. That means there is really no cost
to the government for allowing day trading in an RRSP or a RRIF. However,
any income earned in a TFSA will never be taxed, so allowing day trading
could potentially cost the government money.
Hazy tax rules on business income in TFSA
Problem is, none of this is particularly clear in the Folio or other
communications from the government on TFSA investing or day trading in a
TFSA. In fact, it’s simply not mentioned. That is truly unfortunate given
the breadth and expense of the current audit initiative.
For these reasons, the TFSA proposal process is appropriate. Rules that are
clear, transparent, and simple lead to greater compliance. When that
happens, there is no need to penalize, tax, and charge many years of
interest in retrospect. Notifying taxpayers in retrospect also gives them
no way to mitigate their losses.
Remember that if you have received a TFSA audit letter, the proposed return is not a formal assessment of tax. Investors
should take full advantage of their rights to provide a reasonable
explanation for their pattern of investment activities and their
understanding of this maze of complex laws – or lack thereof – at the time
the investment was actually made.
What happens if you’re offside in TFSA investments?
Be sure to review whether investments in your TFSA are prohibited, and
watch the frequency of your investment activities in your TFSA.
If you are offside, seek assistance in filing the TFSA Return from an
experienced tax advisor. You should also note that the normal filing due
date for this return is annually on June 30. If you have failed to file the
return, you will be charged a late-filing penalty of 5% of the balance
owing plus 1% of the balance owing for each full month the return is late,
up to 12 months. If you were late in filing this return previously, your
penalty will be higher: 10% plus 2% per month for up to 20 months.
originally appeared in the
Knowledge Bureau Report, © 2017 The Knowledge Bureau, Inc. Reprinted with permission. All
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The foregoing is for general information purposes only and is the opinion
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without limitation, investment, financial, legal, accounting or tax advice.