Many taxpayers prefer the ease of investing in a Tax-Free Savings Account (TFSA) rather than a Registered Retirement Savings Plan (RRSP) based solely on the fact that the TFSA is tax free. Adults 18 years and older can contribute up to $10,000 to their TFSA annually. While the RRSP contribution room will generally be much greater than the TFSA, the implications of having to pay tax on any RRSP withdraws outweigh this.
The CRA has recently started to audit businesses and investors on their TFSA growth. Their audit project has issued assessments proposing:
- Tac income and gains within a TFSA that has been carrying on business
- Deregister the TFSA
The CRA is auditing as far back as 2009 for some of these investors because there is no time limit on TFSA assessments since there is no limitation period.
There are several factors the CRA looks at when assessing a business:
- Trading frequency
- The length of time the securities are owned
- Taxpayers’ knowledge
- Time spent by the taxpayer to gain knowledge
- If the securities were purchased were financed by debt
- Any advertising by the taxpayer that he/she wants to purchase securities
- Purpose of the securities.
The size of the TFSA is also an indication to the CRA whether this is for business trading. If the CRA determines that the TFSA is being used for business trading than there will be taxes on the income earned. The 50% inclusion rate will not apply to this scenario.
This is general comment, and you should contact Tax Partners for any questions by sending an email to [email protected] or (905) 836-8755.
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