TFSA: Carrying on a Business Within It
Earnings in a TFSA are typically not taxable. However, earnings in a TFSA become taxable when they are earned from carrying on a securities trading business.
n a February 6, 2023 Tax Court of Canada case, CRA had assessed the TFSA on the basis that it was carrying on a business and was therefore taxable on its income for the 2009 through 2012 taxation years. The TFSA holder was a professional investment advisor who had engaged in aggressive trading in non-dividend-paying speculative penny stocks, all of which were qualified investments. The total income assessed was $569,481, earned from annual contributions of $5,000 in each of 2009, 2010 and 2011.
The taxpayer argued that the TFSA should be treated in the same manner as an RRSP and not taxed on income from a business of trading in qualified investments. The taxpayer further argued that the traditional tests used to determine whether a business of trading in securities was being carried on were inappropriate for application to TFSAs. The taxpayer referred to an earlier Court case that had suggested registered accounts trading in qualified investments are not carrying on a business.
The Court noted that TFSAs are one of several statutory schemes, each with its own detailed provisions. Their components are not interchangeable. In comparing TFSAs to RRSPs specifically, the Court cited ten significant differences between the two schemes other than the treatment of business income.
The Court further noted that the judicial test for carrying on a business of securities trading was well established when TFSAs were introduced in 2008 and would have been known to Parliament when they legislated taxation of income from carrying on a business in a TFSA. This indicated that the existing test was considered appropriate for this purpose.
Parliament provided that income earned from carrying on a business within a TFSA would be taxable to the TFSA. If Parliament intended to exclude a business of trading qualified investments, it would have included the same exception provided for RRSPs.
The TFSA, directed by its holder, traded frequently, had an extensive history of buying and selling shares that were speculative in nature and held the shares for short periods. The holder was a knowledgeable and experienced investment professional and spent considerable time researching securities markets. There was no doubt that the TFSA carried on a business of trading qualified investments throughout the period at issue.