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Day traders battle Canada Revenue crackdown on TFSA use

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Friday, July 20, 2018 – Page B1

A battle has erupted between the Canada Revenue Agency and day traders who argue that they've been unfairly targeted to repay millions of dollars in unpaid taxes because of their use of tax-free savings accounts.

A legal showdown nears as the CRA says it is owed $110-million in additional taxes from audits of the hugely popular saving and investing vehicles.

The $110-million stems from audits conducted over a seven-year period ending March 31, 2018.

That's up from the $75-million figure The Globe and Mail reported last July, which only accounted for audits that took place from April 1, 2012, to March 31, 2016.

Approximately 10 per cent of the $110-million resulted from audits that looked at TFSA accounts that were seen as carrying on a business, such as day trading, which can generate hefty returns through aggressive securities trading.

Tim Clarke, a Vancouver tax lawyer with QED Tax Law Corp., says the CRA is picking and choosing accounts to audit without any clearly defined rules about what is an acceptable amount of money to accrue within an account.

"What we need is a bright-line test," says Mr. Clarke, who is representing several of the TFSA holders appealing the assessments. "We need annuitants and the CRA to know precisely when an amount is taxable and not taxable in a TFSA."

Mr. Clarke believes the CRA's limit is north of $100,000. "The CRA seem to have a threshold - we don't know what it is but we don't see audits for people with TFSAs of less than $100,000."

The lack of clarity from the CRA has resulted in the first case making its way to the Tax Court of Canada, an independent court that handles appeals related to income tax, goods and services tax and employment insurance.

The case was filed in 2015 by one of Mr. Clarke's clients and will be the first TFSA test case to go to trial. A trial date is expected to be set this fall for a date in 2019.

The TFSA was first introduced in 2009 and allows anyone over the age of 18 to contribute $5,500 annually - up to a total of $57,500 - into an account that grows tax-free.

While the vast majority of TFSA holders are using the accounts properly, there are a small number of people using them for aggressive tax planning, Etienne Biram, a spokesman for the CRA, says in an e-mail to The Globe and Mail.

"That's not right, and the CRA is taking action to crack down on these individuals," he said.

The CRA was not able to confirm the amount of tax dollars paid back since conducting these audits, since the agency does not track these reassessments on an annual basis, Mr. Biram said.

However, he was able to confirm the number of TFSA account holders who have disputed their assessments over a two-year period: 1,696 objections from April 1, 2016, to March 31, 2018.

"Most TFSA-related objections are deemed to be low complexity," Mr. Biram said. "The CRA aims to resolve low-complexity objections within 180 days, 80 per cent of the time."

The CRA audits have drawn a negative response from many in the investment community, who want the CRA to provide clearer guidance on the tax rules surrounding the investment accounts.

In 2016, the CRA released a tax guide that included a section on the tax consequences of carrying on a business in a registered plan, but the guide did not specifically say what constitutes carrying on a business inside a TFSA.

During a CRA roundtable discussion in June of 2017 that was hosted by the Society of Trust and Estate Practitioners, the CRA was asked whether it had any plans to educate the public on what the acceptable limits are on securities trading to prevent a TFSA account from being considered to be carrying on a business.

The CRA responded by saying "as there is nothing unique about TFSAs in the context of securities trading, there is no plan to provide any additional guidance specific to TFSAs." "If Parliament or the Department of Finance wanted to limit the income that a TFSA could earn tax-free they could have enacted clear legislation to say that," Mr. Clarke said.

"If the intention is to limit taxfree income to a certain threshold, there is no apparent reason to distinguish between capital gains from the purchase and sale of qualifying securities and business income from actively trading in such securities. Why one is taxable and the other not has not been explained by the CRA or Finance."

"We think their interpretation is wrong," Mr. Clarke added. "And there is an alternate, and we think more cogent, interpretation of the legislation. And the test case will determine which is correct."

(Mr. Clarke couldn't elaborate on the interpretation as the matter is still before the court) Tim Cestnick, president and cheif executive of Toronto-based WaterStreet Group Inc. and a regular contributor to The Globe, agrees the threshold is most likely around the $100,000 mark. He doesn't anticipate the CRA making any concrete rules around the TFSA guidelines.

"Our tax system is more complicated than it needs to be and it should be able to provide certainty as much as possible so people know what to expect," Mr. Cestnick said. "Bright-line tests are definitely able to provide that certainty, but the CRA tends to be more vague and leave it to the courts to set up the principles, which is what we are seeing happen right now."

Other assessments that are included in the $110-million figure arise from additional compliance concerns such as valuation issues, prohibited investments, non-arm's length transactions and overcontributing to accounts.

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