My TFSA Is Being Audited, What Should I Do?
In 2009, the tax-free savings account (TFSA) was introduced across Canada. It was meant to promote investment, and encourage everyday Canadians to save for retirement. Unlike an RRSP, TFSA contributions are not deductible. Rather, money earned in the TFSA is not taxable when withdrawn.
CRA Audit Program
Recently, it has come to our attention that the Canada Revenue Agency (CRA) has started auditing taxpayer’s TFSAs. The CRA is specifically looking for taxpayers who have done extremely well in their TFSAs.
CRAs goal will be to assess tax on the profits made by taxpayers inside their TFSAs by claiming the taxpayer is running a business.
Carrying on a Business
The CRA is looking for taxpayers who are actively trading inside their TFSAs. The reason for this is because the Income Tax Act states that if a taxpayer carries on a business using their TFSA, the profits become taxable. The CRA looks at a number of factors when making this determination. They are:
- Frequency of the trades or transactions;
- Holding period for the securities;
- Skill and knowledge of the taxpayer;
- Time spent by the taxpayer;
- Financed through debt; and
- The general nature of the securities (income producing, speculative, etc.)
Case Law Supports the Taxpayer
In Prochuk v. The Queen, a taxpayer argued that his trading inside of an RRSP should be considered a business so that he could deduct losses he had incurred. The CRA argued that it was not a business, to which the Judge agreed.
The CRAs own position in Prochuk undermines its TFSA audit position. However, CRA is claiming that the decision in Prochuk is extremely limited and does not apply to the TFSA program.
If you have been targeted for a TFSA audit, or you think you will be, call us today! We can assist you through the audit process, the objection stage, and if need be, the Tax Court of Canada.
This article provides information of a general nature only. It does not provide legal advice nor can it or should it be relied upon. All tax situations are specific to their facts and will differ from the situations in this article. If you have specific legal questions you should consult a lawyer.