# Daytrading inside a TFSA for a living



## alexmunger

Can anyone provide evidence that would support the claim that the CRA can tax you for earning $120K per year inside your TFSA and making a monthly withdrawal of $10K to live on? I only trade NASDAQ and NYSE stocks. My broker is Questrade, so I can day trade inside my TFSA is US$.
I have looked extensively on the CRA's website and wasn't able to find the answer.
I have read countless forum posts that say you shouldn't do that, and that is it is considered operating a business inside your TFSA. However, is there an actual rule that prevents that? I need proof! 
So far, I found that income from owning a "prohibited investment" would be taxable inside the TFSA, but that still doesn't apply to my situation since NASDAQ and NYSE stocks are allowed.
Thank you all in advance!


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## Robillard

I'm not sure if this is the right reference, but I think IT479R (http://www.cra-arc.gc.ca/E/pub/tp/it479r/it479r-e.html) explains that "trading" in securities generally leads to the trading gains treated as on your income account, rather than capital account. Also, if you earn by short selling, this is always treated as income rather than a capital gain. It is my understanding that daytrading income is not treated as "investment income". It is treated more like business income. Investment income generally consists of dividends, interest, capital gains, and certain other types of income. And so, for the purposes of the TFSA, daytrading gains are supposed to be fully taxable, because the TFSA does not let you earn business income tax free.


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## Woz

I have no definitive proof one way or the other, but the following court case discussed day trading in an RRSP which may be applicable.

http://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/66430/index.do

From the court decision:

"From the above, it can be seen that the Act treats an individual who trades within his RRSP differently than a taxpayer who is in the business of trading. For this reason, trades within an RRSP are not relevant in deciding whether an individual is in the business of trading."


Is this a hypothetical question, are do you actually plan to generate $120k of profits on a $31k TFSA every year without any margin?


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## SkyFall

I had the same question, I called the CRA and they were confuse too... I got transfer and retransfer........ end up hanging up!


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## andrewf

If you can generate $120k from $31k each year, then forget about tax implications--you have a license to print money.

400% return per year turns $31k into $300 billion in 10 years.


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## indexxx

Wow, I'd like to know that day trading strategy- I'm assuming one would never blow a trade or be a victim of bad luck or the whims of the market or even a correction. 400% return?? Buffett would give you a reacharound.


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## HaroldCrump

andrewf said:


> If you can generate $120k from $31k each year, then forget about tax implications--you have a license to print money.
> 400% return per year turns $31k into $300 billion in 10 years.





indexxx said:


> 400% return?? Buffett would give you a reacharound.


umm...so you guys haven't figured out who the poster is?
He is Charlie Munger's grandson.
_Of course_, he can generate 400% annual returns


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## Pluto

I was under the impression that when one started buying and selling stock they made an either/or election. Either they want gains to be treated as capital gains ( and your expense deductions are limited), or you want gains treated and taxed as business income, and a more expense deductions are available to you. Apparently this is a lifetime election. As far as I know if you elect the former, or the latter, and you only hold your stock for a day, it doesn't change your tax status. So if one day trades in a TFSA, so what? I know of no requirement that one must hold for longer than a day otherwise one is operating a business eith er inside a TFSA or outside of it. that doesn't mean I'm correct, it just means I never heard of it. 

What I think you should do regarding the tax and business issue is write a letter to CRA with clearly formed questions. State your interpretation and then ask if you are correct. they are required by law to respond with a clear answer. 

But I think you underlying premise might be mistaken: you are assuming if you day trade you will make large sums of money. Are you under the influence of some one marketing high end real time charting software who has convinced you you can make huge sums of money at this? If someone selling you something (a trading system and/ or software ) can make that kind of money, why is he selling instead of trading stock?


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## gt_23

alexmunger said:


> Can anyone provide evidence that would support the claim that the CRA can tax you for earning $120K per year inside your TFSA and making a monthly withdrawal of $10K to live on? I only trade NASDAQ and NYSE stocks. My broker is Questrade, so I can day trade inside my TFSA is US$.
> I have looked extensively on the CRA's website and wasn't able to find the answer.
> I have read countless forum posts that say you shouldn't do that, and that is it is considered operating a business inside your TFSA. However, is there an actual rule that prevents that? I need proof!
> So far, I found that income from owning a "prohibited investment" would be taxable inside the TFSA, but that still doesn't apply to my situation since NASDAQ and NYSE stocks are allowed.
> Thank you all in advance!


Unfortunately, there is no simple answer to your question as this issue is not yet resolved. These issues are pretty complex, and I don't think relying on "forum posts" will give you the confidence you need to implement this strategy.

I work in the securities industry with a major brokerage. We have clients with 7-figure TFSA accounts. When the Feds introduced the TFSA, they didn't anticipate the type of trading activity in this account that would generate these large gains. So there weren't a lot of rules in place to regulate the types of instruments and activity. However, CRA has in some cases gone after clients for taxes where they think clients are carrying on a business (I assume that because TFSA is disclosed to CRA, that this is the trigger for their audits, when they see unusual account sizes or lots of activity). Furthermore, CRA has gone after brokerages for taxes owing when clients withdraw or transfer these TFSAs (presumably some clients understand they could be liable for taxes on their TFSA and withdraw the funds). This has created a significant issues for brokers, who have suffered financial penalties in these cases. As a result, several industry bodies, including IIAC, are actively seeking clarification on these issues from the CRA, however, the CRA has been reluctant provide consistent guidelines and advice.

I think that if CRA doesn't come up with stricter rules to prevent trading in TFSAs, you will eventually see restrictions on a broker by broker basis. These are usually coordinated among the big brokerages (i.e. bank-owned for sure), however, I can't speak to what Questrade would do, or if they're even aware of these issues.

So under the current status quo, if you trade actively in a TFSA such that it is deemed to be carrying on a business, CRA can and will assess taxes at their discretion. The rules will most likely change in the future, either by the CRA, or by the brokerage industry, to restrict active trading in these accounts.


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## SkyFall

However, the idea of "can the CRA demand tax on a TFSA'' is kinda off to me only base of the ''daytrading'' aspect..... let's say someone with a maxed out TFSA $31k does trade A LOT but end up with only $1-2k gains..... and a second person with a maxed out TFSA bought GPRO with his whole $31k..... well that person (at the peak of GPRO) had well over $100k..... if the CRA want taxes, they don't want the piece of pie of the first person.... they want a pie from the second....

my2cent


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## Eclectic12

^^^^

What makes you think they don't want a piece of both pies?

http://business.financialpost.com/2012/03/08/cra-probing-high-flying-tfsas/?__lsa=bb3b-1f18
http://www.thor.ca/blog/2013/02/cra-expands-audits-of-tax-free-savings-accounts-tfsas/
http://www.investmentexecutive.com/...hF/content/some-tfsas-in-auditors-crosshairs/


Cheers


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## Eclectic12

gt_23 said:


> Unfortunately, there is no simple answer to your question as this issue is not yet resolved. These issues are pretty complex, and I don't think relying on "forum posts" will give you the confidence you need to implement this strategy.


Agreed ...




gt_23 said:


> U So there weren't a lot of rules in place to regulate the types of instruments and activity...


I'm surprised at this as I seem to recall reading in Mar 2009 on the gov't TFSA web site that the acceptable TFSA investments were pretty much the same as those in an RRSP.
The rules increasing the penalty for intentional over-contributions or swaps that used low traded stocks to artificially change the values were proposed as early as the fall of 2009.


Cheers


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## Pluto

SkyFall said:


> However, the idea of "can the CRA demand tax on a TFSA'' is kinda off to me only base of the ''daytrading'' aspect..... let's say someone with a maxed out TFSA $31k does trade A LOT but end up with only $1-2k gains..... and a second person with a maxed out TFSA bought GPRO with his whole $31k..... well that person (at the peak of GPRO) had well over $100k..... if the CRA want taxes, they don't want the piece of pie of the first person.... they want a pie from the second....
> 
> my2cent


from a $ perspective you have point. But I think the issue is, is day trading a job/business, and if it is, should it be/is it permitted tax free in tfsa's? If its a business, they are going to want to ban it in tfsa's, I would think. And what rules would be used to ban it? And would those rules interfere with regular investors? this could end up in court, couldn't it?


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## LBCfan

I doubt that you will make enough day trading in your TFSA (max $31K to start) to alert CRA. If you are good enough to to make $120K/yr on day-trading a $31K start, just pay the tax and brag about it.


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## peterk

This is absurd. The broker doesn't provide a T-slip regarding gains or losses anyways since it's a TFSA...

Essentially OP is asking "when my TFSA is so outrageously successful, and I am withdrawing 10k/month in gains, will the CRA get suspicious and question my amazing day trading skillz? lol"


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## Eclectic12

The broker may not be providing a T-slip but based on the reports of TFSA questionnaires as well as TFSA audits - there must be some sort of broker to CRA reporting happening beyond the TFSA contributions/withdrawals that factor into when over-contributions have happened.


Cheers


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## domelight

gt_23 said:


> I work in the securities industry with a major brokerage. We have clients with 7-figure TFSA accounts. .



Now I'm not saying this is impossible (especially if you made great returns in the last large market decline) 
but your telling us that if I invest 5k once a year with you. That your historical average is 125% annual growth for six consecutive years. 
I'm debating whether to call Bullsh** or ask for your business card. 
(Quite obviously I'm assuming that the brokerage fee's are being paid from somewhere other than the TFSA and I further imagine that they are significant)


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## Eclectic12

domelight said:


> ... but your telling us that if I invest 5k once a year with you ...


I'm not sure how the *brokerage* having clients with 7 figure TFSAs is somehow means that the poster is providing such top notch investing advice.




domelight said:


> ... I'm debating whether to call Bullsh** or ask for your business card.
> (Quite obviously I'm assuming that the brokerage fee's are being paid from somewhere other than the TFSA and I further imagine that they are significant)


Again ... I'm not sure why these assumptions are being made.

I'm also not aware of any mechanism to pay fees for a TFSA (not to mention the buy/sell commissions) from anywhere except the TFSA itself. Yet by category, this article lists TFSAs from $300K through $46K. 
http://www.moneysense.ca/save/tfsa/the-great-tfsa-race

Then there's the $102K TFSA.
http://business.financialpost.com/2...-out-the-balance-in-his-tfsa/?__lsa=a01f-3a16


Now if the poster works for a major brokerage ... how many TFSA clients are there in total so that based on numbers alone without any advice being given, there's some big TFSAs?


Returning to the thread category ... I notice than none of the articles outlining big value TFSAs are mentioning day trading as a means to achieve a super-large TFSA value.


Cheers


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## gt_23

domelight said:


> Now I'm not saying this is impossible (especially if you made great returns in the last large market decline)
> but your telling us that if I invest 5k once a year with you. That your historical average is 125% annual growth for six consecutive years.
> I'm debating whether to call Bullsh** or ask for your business card.
> (Quite obviously I'm assuming that the brokerage fee's are being paid from somewhere other than the TFSA and I further imagine that they are significant)


That's not what I said. The clients are self-directed clients in the discount brokerage.


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## gt_23

Eclectic12 said:


> The broker may not be providing a T-slip but based on the reports of TFSA questionnaires as well as TFSA audits - there must be some sort of broker to CRA reporting happening beyond the TFSA contributions/withdrawals that factor into when over-contributions have happened.
> 
> 
> Cheers


CRA gets all the details directly from the FI, hence why it is called a "registered" account.


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## gt_23

Eclectic12 said:


> Returning to the thread category ... I notice than none of the articles outlining big value TFSAs are mentioning day trading as a means to achieve a super-large TFSA value.
> 
> Cheers


I suspect that those that are clever enough to turn $30k into 7-figures through in and out trading (and not just luck) are also clever enough to realize that being the subject of a media story is sure to increase the chances that they reach the attention of the CRA.


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## liquidfinance

I think that it is safe to say the CRA would end up taxing the account. Much in the same way as gambling winning are tax free unless you are making a living from it. It would likely go to court but that wouldn't be a problem seeing as you could easily afford it.


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## Eclectic12

gt_23 said:


> I suspect that those that are clever enough to turn $30k into 7-figures through in and out trading (and not just luck) are also clever enough to realize that being the subject of a media story is sure to increase the chances that they reach the attention of the CRA.


Maybe ... it's pretty clear that some of those clever enough to reach 6-figures with less than $30K didn't figure out that the media story would bring them to CRA's attention.

As well - I'm curious as to whether the guy who has now come to CRA's attention due to a media article will have his theory proven or shattered. According to the article, he's prepared for CRA should they say the investment is not eligible for the TFSA as he had his bank approve the trade first. Somehow - I'm doubting that CRA will go after the bank & let him off the hook, if they determine the investment was not eligible.


Cheers


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## SkyFall

Eclectic12 said:


> Maybe ... it's pretty clear that some of those clever enough to reach 6-figures with less than $30K didn't figure out that the media story would bring them to CRA's attention.
> 
> As well - I'm curious as to whether the guy who has now come to CRA's attention due to a media article will have his theory proven or shattered. According to the article, he's prepared for CRA should they say the investment is not eligible for the TFSA as he had his bank approve the trade first. Somehow - I'm doubting that CRA will go after the bank & let him off the hook, if they determine the investment was not eligible.
> 
> 
> Cheers


if they use the ''not eligible'' argument and does tax on the trade.... would it mean, if the person instead of realizing capital gains have losses the CRA will have to grant perk of deduction the losses on future gains like on a non-registered account? They can just cherry pick profitable trade and turn them into cash cows?


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## gt_23

Eclectic12 said:


> Maybe ... it's pretty clear that some of those clever enough to reach 6-figures with less than $30K didn't figure out that the media story would bring them to CRA's attention.
> 
> As well - I'm curious as to whether the guy who has now come to CRA's attention due to a media article will have his theory proven or shattered. According to the article, he's prepared for CRA should they say the investment is not eligible for the TFSA as he had his bank approve the trade first. Somehow - I'm doubting that CRA will go after the bank & let him off the hook, if they determine the investment was not eligible.
> 
> 
> Cheers


I think you might be misunderstanding some things that I have said:

1) I think that in most cases, those appearing in media stories to brag about their 6-figure TFSA were just lucky on a couple stocks and didn't deliberately set out to trade for exponential gains in this account (and are therefore not clever as you suggest). Anyone with the market savvy to deliberately trade up their account to 6- or 7-figures probably understands all of these issues well and wouldn't need to brag publicly about their success.

2) The CRA doesn't "go after the banks" for allowing their customers to trade improperly within a TFSA. The examples I referenced were where the CRA assessed penalties on the TFSAs of taxpayers who were no longer clients of the broker where they used the account. 

3) The examples I know of where CRA levied taxes on a TFSA were because the agency determined the owner was carrying on a business. There are many factors that go into that determination including: frequency of trading, instruments, turnover, use of proceeds, account size, etc, etc.


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## Eclectic12

SkyFall said:


> ... They can just cherry pick profitable trade and turn them into cash cows?


I expect they would ... they are trying to punish those who are breaking the rules, after all.
http://business.financialpost.com/2...can-invest-that-in-your-tfsa/?__lsa=1d11-d4ca

As usual - there's leeway for those who can convince CRA that it was not intentional but an honest mistake.


Cheers


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## Eclectic12

gt_23 said:


> ... 1) I think that in most cases, those appearing in media stories to brag about their 6-figure TFSA were just lucky on a couple stocks and didn't deliberately set out to trade for exponential gains in this account (and are therefore not clever as you suggest).


With quotes of "I don't recommend this to anyone", "I want something with multiple opportunities to make money,” says Dennis, who is looking for 300% to 400% returns", or "it's worthless but it's traded heavily with hedge funds pouring into it" or "I have special access to know what's under valued - it's sounding like less luck than you are thinking ... but only the individuals know for sure.




gt_23 said:


> ... 2) The CRA doesn't "go after the banks" for allowing their customers to trade improperly within a TFSA.


So we are in agreement then ... his argument that "the broker let me do it" is not likely to get CRA to waive the penalties for a non-eligible investment.


Cheers


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## warp

Interesting to me that no-one has even mentioned the other side of this coin.

What if the "day-trader" LOST the majority or all the money in his TFSA with bad trades? Lets say it went to zero, ( even after having big early gains)

Would CRA allow him to deduct these losses from his other income, because he may say it was a business?
I somehow doubt it.....but that's usually their way...they like whatever works best for them..( in terms of stealing your money, that is.)


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