CRA TARGETS SAVINGS
Tax- free accounts under scrutiny
He has close to $ 1.25 million in his tax- free savings account and now the Canada Revenue Agency wants to know how.
“They told my accountant it was impossible for one person to have amassed that much money in an account in such a short period,” said John, a former Bay Street trader, who didn’t want to give his last name because he’s in an ongoing battle with the CRA.
The CRA has previously confirmed to the Financial Post that it has been investigating a small percentage of Canadians who have high balances in their TFSAs and are in the “business” of trading. Those people are the subject of audits and forced to pay taxes on all their TFSA gains, which are normally tax- free for the almost 11 million of Canadians who have opened an account since 2009.
The federal agency has not said specifically what will get you audited but is using eight factors to determine if an account is a business — your day job heavily impacts any audit.
What it means is that Bay Street types are in the CRA’s sights because of what they do for a living, according to a Calgary lawyer who is representing TFSA holders being audited.
“I think people in the industry are more likely to have significant balances and I think the CRA probably has a threshold over which they are more likely to audit,” said Tim Clarke, a lawyer with Calgarybased Moodys Gartner Tax Law LLP.
Clarke says he has seen clients with close to or more than $ 1 million in their TFSA and many are people with knowledge in their industry, but ultimately investors just taking some high- risk gambles. For every winner, the lawyer says there are hundreds of losers.
“You can have two people doing the identical trade, one based on a recommendation from a broker. One could be a school teacher and one could be in the industry. CRA looks at that and says, since it was related to your day job, your TFSA is offside,” he said.
The eight factors that CRA looks at before an audit include: frequency of transactions, period of ownership, knowledge of securities markets, trading experience, time spent on account, financing, advertising for investments and the speculative nature of the investment.
“Your day job shouldn’t count. If you’re a broker or dealer in securities you are also entitled to save for retirement. If you are good at it, it doesn’t mean your TFSA should be taxed,” said Clarke.
That appears exactly to be what happened to John, a 50- year- old institutional trader, who showed the Financial Post his latest TFSA statement from May with a $ 1.22 million balance and a letter from CRA detailing an audit for the period from Jan. 1, 2009 until Dec. 31, 2013.
“They tell you you can have a tax- free account, but they should also say if you make too much we’ll take it back from you,” says John, who adds that using the same aggressive strategy in his registered retirement savings account cost him almost everything. His current balance is $ 50,000 after more than two decades of contributions.
He made his seven figures in his TFSA with a series of long shots on penny stocks and warrants. One of his first trades was TerraX Minerals Inc. He bought 33,000 shares for 30 cents and sold for 39 cents the next day. He bought 500,000 shares in Ashburton Ventures Inc., another exploration company, at eight cents and sold for 19 cents less than a week later.
“I watch the tape all the time and I handled the capital for my firm so I was always looking at different trades,” said John, who says his biggest gain was on a warrant for a technology stock he won’t specify because it might identify him.
As an accredited investor, he was also able to invest in initial public offerings of Baytex Energy Corp. and Seven Generations Energy Inc. Both shot up quickly and he’s since sold. He took a swing at a company called Intertainment Media Inc., which be bought at 30 cents and jumped to $ 1.50. All of his holdings are now in large capital and liquid stocks, relatively safe investments.
Jamie Golombek, managing director of tax and estate planning with CIBC, says audits of TFSA are still relatively rare but people on Bay Street probably should be on alert. “These are people involved in the business of securities,” he says. “Obviously, it’s more of a concern if you make your living giving out stock advice. The average person doesn’t have to be concerned.”
All major banks have compliance rules when it comes to trading but one Bay Street analyst said none of it specifically addresses TFSA accounts. The Investment Industry Association of Canada says the CRA should provide the tip sheet that warns about the eight factors that could result in an audit available to all taxpayers.