There was some proposed legislation that would treat day trading of stocks in a TFSA to be treated as taxable, Im not sure if this has passed or not.
In 2018, taxpayer opens a TFSA and begins day-trading, completes 184 trades during the course of the 2018 calendar year. He has realized a capital loss.
Should he transfer stocks to a non TFSA account?
Should he claim the capital losses , or is it deemed business and a regular loss?
Should he present the facts to CRA and obtain a ruling?
Taxpayer is not in the financial services sector, took up investing as a hobby.
I think it would be wise to obtain a ruling,
I’m not sure that recent legislation contained any special measures to treat the Day-Trading of stocks within a TFSA as business income (thus fully taxable). The CRA has always maintained this position (since their creation in 2009) but have really only been aggressively auditing high value TFSA’s since about 2016. The amount of “Day-Traders” who lose money outnumber the winners, likely by a multiple of 10 or more, yet the CRA don’t seem to bother chasing those with TFSA business losses. It seems the CRA is relying on IT-479R to assist in determining whether gains are being made on account of capital or income, and essentially applying this the same way as they would to transactions made outside the TFSA.
I think what the recent legislation actually proposes is that the “account holder” of the TFSA be liable for the income tax if it is determined the TFSA has in fact been earning business income. Prior to this proposal, it was the TFSA itself and the Financial Institution that were liable for any income tax owing on the TFSA profits.
Basically speaking, under existing legislation, it seems that if the TFSA funds had been withdrawn, the CRA could go after the financial institution for the tax on the income earned. Under proposed legislation, the financial institution and the TFSA account are still responsible, to a maximum amount of whatever is left remaining in the TFSA. The TFSA account holder would then be liable for any shortfall.
It would seem natural the account holder of the TFSA would be responsible for the income tax arising from TFSA business income, but apparently not. New legislation was needed to shift the responsibility to the account holder.
This change will apply to 2019 and future years.
I’m pretty sure the new legislation does little or nothing to define or expand on what does and doesn’t constitute business income earned within a TFSA.
In your case @walt if the Taxpayer has “capital losses” in the TFSA, and transfers out to a non-registered account, he simply has nothing. There are no “capital losses” to claim because the value was lost within the TFSA. It would only be if you decided to treat the losses as losses from a business that you would have any hope of being able to deduct the loss. It would depend on the sophistication of the investor, as well as other relevant facts. I would think it would be an uphill battle if the investor doesn’t have a very good grasp of the market, or works in that industry.
As SPG states, the additional legislation deals only with the issue of tax collection, not assessment. Where a TFSA engages in tax-productive activities (of whatever nature) the tax is assessed against the Trust…which is a separate entity from the holder/director (much the same as a corporation). The Financial Institution was the manager of the trust and responsible for same…hence the new “joint and several” liability junction.
On the issue of Income vs CG, generally CRA will not rule on it as it will be “a question of fact” and they leave all of those to the Courts to determine. They will usually rule only on questions of law.
In my opinion, your client is at best a borderline case for inclusion as income, and likely with one trade every two days - or one trade roughly per business day - fails to meet the tests or standards for an adventure in the nature of trade - especially if he has no training or other connections to securities investment. It’s still a question of fact, but seems relatively unlikely - at this stage of his development. That may change over time, something of which you need to remain aware. (I fought a similar case some years back involving a broker … much more challenging!)