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Investors found carrying on a business – such as day traders – will now be held legally responsible for any tax owing on income earned in a tax-free savings account.

In the 2019 budget, the federal government proposed the changes stating the TFSA holder is “typically in the best position to determine whether the activities of the TFSA constitute carrying on a business,” and therefore should be the one held responsible for paying any amount owing in tax.

While the Canada Revenue Agency allows securities trading it deems to be passive to occur within a TFSA, it has deemed day trading (buying and selling a security over the course of a day to profit from small price moves) to be a business, and will tax it accordingly.

Under current rules, the trustee of the TFSA – which is typically the financial institution who opened the TFSA – is “jointly and severally liable,” along with the TFSA account itself, for taxes owing. Therefore, if a TFSA is found to be carrying on a business and owes tax, the amount is taken directly from the funds in the account. But in cases where there are insufficient funds in a TFSA – such as an investor who withdraws all the funds prior to a CRA notice or transfers the TFSA assets to a different financial institution – the trustee is responsible for the tax owing.

“This was certainly an unfair position for institutions to be put in,” says Doug Carroll, a tax expert at Meridian Credit Union. “Especially when an account holder could easily pull the plug on their TFSA and move all funds elsewhere, leaving the financial institution that opened the original account to be on the hook with the CRA.”

A TFSA is a registered account that allows Canadians to earn tax-free investment income on a wide range of investments. However, a TFSA is liable to pay tax under the Income Tax Act on income from a business carried on by the TFSA or from non-qualified investments.

The budget proposal would apply to the 2019 and subsequent taxation years; and comes at a time when the CRA has been paying closer attention to balances within TFSA accounts after a number of them swelled to more than $1-million through aggressive securities trading.

The CRA was not available to comment as to whether a financial institution has ever been held responsible for paying the tax on a TFSA account to be carrying on as a business. But Jack Rando, managing director of the Investment Industry Association of Canada, said the proposed changes address a major concern by the industry because there have been cases of financial institutions receiving notices of assessment from the CRA for accounts that did not have enough assets to pay the tax owing.

“The [proposed changes] will certainly put an end to these unfortunate conversations that usually end in the financial institution having to point fingers at clients or former clients,” Mr. Rando said in an interview with The Globe and Mail. “Now, financial institutions will be able to administer these highly popular types of savings accounts to clients, but in a more refined, risk-free environment.”

The CRA has been under fire from many in the investment community for not providing clearly defined rules about what is an acceptable amount of money to accrue within an account, clarity Mr. Rando says he was hoping to see the government provide.

“I’m not sure we are ever going to see a brightline test on what may put a TFSA account offside,” he added. “The CRA likes to look at things from a case-by-case basis.”

Last year, a legal battle against the CRA ensued after a group of investors began to argue that they’ve been unfairly targeted to repay millions of dollars in unpaid taxes because of their use of TFSAs. The case is still before the courts.

TFSAs were first introduced in 2009 and allow anyone older than 18 to contribute $5,500 annually into an account that grows tax-free. Between 2009 and 2017, the CRA has assessed approximately $114-million in taxes resulting from audits of TFSAs, with approximately 10 per cent of that amount from audits that specifically targeted TFSA accounts that were seen as carrying on a business.

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