Frequently trading stocks in your TFSA? The CRA may have questions
Global News
Many young Canadians have started investing during the pandemic, often opening self-directed TFSAs. But too much trading inside a TFSA could trigger tax consequences.
The COVID-19 pandemic and soaring stock market have given young Canadians a taste for buying and selling their own securities. But not all newbie DIY investors seem to know there are potential tax risks in trading too frequently inside a tax-free savings account (TFSA).
“We’ve seen cases on it,” says Jamie Golombek, managing director of tax and estate planning at CIBC Private Wealth Management.
“When I get calls from clients who say that they’re 19, 20-year-old sons want to open up TFSA accounts for trading, I caution them. I say, ‘you’ve got to be very, very careful’,” Golombek says.
The downside is risking unwanted attention from the Canada Revenue Agency (CRA).
Canadians can hold qualified investments like stocks, bonds, exchange-traded funds (ETFs), mutual funds and guaranteed investment certificates in their TFSA. And inside the account the investments grow tax-free (although foreign governments may withhold tax on income from foreign investments — an issue well-known to many Canadians who receive U.S. dividend income in their TFSAs.)
But as noted in a recent warning from RBC in its Direct Investing site, “it’s important to remember that TFSAs are registered accounts intended for investing and growing your savings over time.” If you buy and sell investments frequently inside a TFSA, the CRA “may consider your account to be ‘carrying on a business’,” the note continues.
In such a scenario, investment income such as dividends, interest or any net gains from selling stocks would become subject to tax.
“The risk of individuals being characterized as carrying on a business for trading in their TFSA is much higher now than it would have been a few years ago, because there’s just simply more new inexperienced investors who are trading in their TFSA,” says David Dyck, head of client services at CI Direct Investing.