Trading in TFSAs and FHSAs: When Does it Trigger Tax?

It’s straightforward to assume “tax-free” always means tax-free, but there are instances when income earned in a registered account – including investment income and realized capital gains – may be subject to income tax. Both Tax-Free Savings Accounts (TFSAs) and First Home Savings Accounts (FHSAs) offer tax advantages, but frequent trading within these accounts can inadvertently trigger tax liabilities. Here’s a breakdown of how trading activity can impact your TFSAs and FHSAs.

How TFSAs Work

TFSAs allow you to hold qualified investments like stocks, options, exchange-traded funds (ETFs), mutual funds, bonds, and Guaranteed Investment Certificates (GICs). Contributions are not tax-deductible, but withdrawals are tax-free. Though, foreign governments may withhold tax on foreign-sourced income held within a TFSA, potentially reducing your overall return. Utilizing a W-8BEN form may help reduce withholding tax rates on U.S. Income.

The federal government sets annual TFSA contribution limits, indexed to inflation.

How FHSAs Work

Similar to TFSAs, FHSAs are restricted to qualified investments and are subject to annual contribution limits. Withdrawals are tax-free if used to purchase a first home. If you don’t apply the FHSA to buy a home, investments can be transferred to an RRSP.

When Does Trading Turn into Taxable?

Both TFSAs and FHSAs are designed for long-term investing, not frequent trading. If the Canada Revenue Agency (CRA) determines you are “carrying on a business” within your TFSA or FHSA, any income (dividends and interest) and realized gains (net of losses) will be subject to tax.

The CRA hasn’t provided specific guidelines on how much trading is too much. The determination is based on a review of individual circumstances.

What Factors Does the CRA Consider?

The CRA considers several factors when determining if trading activity constitutes “carrying on a business,” including:

• Frequency of transactions: A history of extensive buying and selling of securities.
• Period of ownership: Securities held for only a short period.
• Knowledge of the securities market: Demonstrated expertise and time spent studying the market.
• Financing: Purchases financed primarily on margin or through debt.
• Type of shares: Speculative shares or non-dividend-paying stocks.

Tax Implications for Other Registered Accounts

Income earned from carrying on a business within other registered plans, such as RRSPs, RRIFs, and RDSPs, is similarly generally taxable. If the CRA considers an RESP to be carrying on a business, it can revoke the plan’s registration and tax-sheltered status.

Disclaimer: This information is for general purposes only and does not constitute personal financial or tax advice. Consult with a professional advisor for advice tailored to your specific financial and tax needs.