Do you trade stocks frequently with TFSA? CRA may have questions-nationwide

The COVID-19 pandemic and soaring stock market give young Canadians a hobby to buy and sell their securities. However, all novice DIY investors seem to know that there is a potential tax risk of trading frequently within a tax-exempt savings account (TFSA).

Jamie Golombeck, Managing Director of Tax and Real Estate Planning at CIBC Private Wealth Management, said:

“When I get a call from a client who says I’m 19 years old, my 20-year-old son wants to open a TFSA account for a transaction. I warn them.” You are very, very, very. You have to be careful, “I say,” says Golombek.

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The downside is the risk of unnecessary attention from the Canada Revenue Agency (CRA).

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Canadians can hold eligible investments in TFSA such as stocks, bonds, exchange traded funds (ETFs), investment trusts and guaranteed investment certificates. And investments are tax exempt in your account (although foreign governments may withhold taxes on income from foreign investments, which is well known to many Canadians who receive US dividend income at TFSA. It’s a problem).

However, as noted in a recent warning on RBC’s Direct Investing site, “Remember that TFSA is a registered account aimed at investing and expanding savings over time. Is important. ”If you frequently buy and sell investments within the TFSA, the CRA may consider your account to be“ running a business, ”” he continues.

In such scenarios, return on investment such as dividends, interest, or net income from the sale of shares is taxable.

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“Because only more new and inexperienced investors are trading on TFSA, the risk that an individual is characterized as running a business to trade on TFSA is much higher than it was a few years ago. “Masu,” says David Dyck. , Head of Client Services for CI Direct Investing.

In Canada, self-investment accounts have skyrocketed since the pandemic began, and TFSA holds a significant share of these accounts, he said. And a significant portion of recently opened accounts belong to new investors who “have no experience investing in the past and are learning a kind as they progress,” says Dyck.

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WealthsimpleTrade, one of Canada’s most popular trading apps, doubled the number of new accounts in 2020 and doubled in the first half of 2021, according to data provided by the company. Wealth Simple Trade started in March 2019.

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What you may not know about TFSA

What you may not know about TFSA – November 9, 2019

Transactions within TFSA: How Much?

There are no defined restrictions on trading on TFSA.

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“Generally, taxpayers are allowed to adjust their TFSA portfolio on a regular basis. This is caused by a fundamental change in the securities owned by the taxpayer, a change in investment strategy, or the need to withdraw funds. “It is possible,” CRA told Global News in an email.

“Whether taxpayers are using TFSA to carry out their business is a matter of fact that can only be determined after considering their particular situation,” he said.

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According to the CRA, day trading (buying and selling investments on the same day or multiple times a day) is one of the activities that may constitute business continuity. By that email. The tax authorities said that other factors that may be related to that decision include a short history of securities ownership, the degree of knowledge investors have about the securities market, and investors’ considerable research into financial markets. Whether you have spent time, potential investment purchases, and whether investors have used their debt primarily to raise funds for financial investment purchases.

“None of the individual factors may be sufficient to characterize a taxpayer’s activity as a business, but some combination of those factors may be sufficient for that purpose,” the agency said. Said.

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Canadians do not have to file their year-end TFSA balances on their tax returns, but financial institutions provide that information to the CRA each year, Golombek and Dyck said.

“Looking at the balance at the end of the year and seeing how much it is compared to the individual TFSA Contribution Room can trigger some questions and reviews by CRA,” says Golombek.

Dyke says the extra scrutiny itself is something investors may want to avoid.

“In the end, there is an additional burden that investors may want to avoid, even if they do not violate the rules.”

© 2021 Global News, a division of Corus Entertainment Inc.

Do you trade stocks frequently with TFSA? CRA may have questions-nationwide

Source link Do you trade stocks frequently with TFSA? CRA may have questions-nationwide

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