Canada: Canada Revenue Agency's Aggressive Audit Campaign Against TFSAs Carrying On A Business

Last Updated: October 31 2017

When Tax-Free Savings Accounts Are No Longer Tax Free: The Canada Revenue Agency’s Aggressive Audit Campaign Against TFSAs Carrying On A Business—A Canadian Tax Lawyer’s Analysis

Introduction: Tax-Free Savings Accounts Audits

Introduced in 2009, the tax-free savings account allows individuals to set money aside tax free. While you cannot claim tax deductions for your TFSA contributions, the TFSA’s earnings are tax free even when withdrawn. If the tax-free savings account carries on a business, however, that income is taxable under subsection 146.2(6) of Canada’s Income Tax Act.

Recently, the Canada Revenue Agency has hung its hat on the business-income exclusion as the basis for an aggressive audit campaign. The CRA claims that it has identified over $75 million owing from inappropriate TFSA use. Of the $75 million, 20 percent comes from tax-free savings accounts that, according to CRA, carry on a business.

This article first discusses the factors that the Canada Revenue Agency uses to determine whether a TFSA carries on a business. Next, it compares the Agency’s approach to TFSAs with its contrary stance on registered retirement savings plans. Finally, this article offers several tips that may prove worthwhile to the concerned reader.

TSFAs Carrying On A Business: Frequent Traders With Large Balances Beware of Tax Audit

When auditing a tax-free savings account, the Canada Revenue Agency applies several factors to determine whether the account carries on a business and thus earns taxable income. These factors come from a long line of Canadian tax cases wrestling with the question of whether a gain or loss from selling securities should be on income account or capital account.

As a result, the following factors may cause the Canada Revenue Agency to conclude that your TFSA carries on a business:

  • you conduct frequent securities transactions within your TFSA
  • you quickly relinquish ownership of the securities in your TFSA
  • you have knowledge of or experience in securities markets
  • securities transactions form a part of your ordinary business or employment
  • you spend ample time studying securities markets and potential purchases
  • you use debt financing to purchase securities that you transfer to your TFSA
  • you advertise your willingness to purchase securities
  • the securities within your TFSA are speculative in nature or do not distribute dividends

In addition, the CRA insists that extraordinary growth within your tax-free savings account serves as an important indicator of business activity.

Some question, however, whether Parliament actually wished to bar frequent securities trading within a tax-free savings account. Although the Income Tax Act expressly renders taxable the business income of a TFSA, it seems that this caveat simply ensures that taxable businesses need not compete with tax-exempt TFSAs.

In addition, not only are publicly traded securities a permitted investment, but also the TFSA contribution-room formula seemingly anticipates fairly frequent trading activity. Indeed, this recent round of CRA tax audits were triggered by individuals amassing impressive TFSA balances without overstepping their contribution limits.

Inconsistent Treatment? Trading in An RRSP

Others simply find it puzzling that the Canada Revenue Agency seemingly adopts a contradictory position without explanation when it comes to registered retirement savings plans. Like a TFSA, a registered retirement savings plan is tax-assisted savings vehicle. Moreover, an RRSP permits the same investment holdings as those allowed in a TFSA. Yet, in Prochuck v the Queen (2014 TCC 17), the CRA and the Crown found themselves arguing that frequent trading within an RRSP does not amount to carrying on a business since an RRSP is “a unique tax-protected vehicle.”

In Prochuck, the taxpayer suffered a substantial loss on an investment outside his RRSP. He wished to characterize the loss as a fully deductible business loss. The CRA argued that the loss was only a one-half deductible capital loss. In response, the taxpayer pointed to the 512 trades that he made within his registered retirement savings plan during the taxation year at issue. The CRA and the Crown took the position that trading inside an RRSP cannot be considered a business. The Tax Court of Canada agreed. The court reasoned that the Income Tax Act “treats an individual who trades within his RRSP differently than a taxpayer who is in the business of trading.” In particular, while a taxpayer earning business income from trading must report all income on a yearly basis, a taxpayer trading within a registered retirement savings plan can move funds around inside of the RRSP without tax consequence and accumulate tax-free income on funds held in an RRSP. On this basis, the court concluded that “trading within an RRSP does not amount to carrying on the business of trading.” Interestingly, a tax-free savings account seemingly exhibits the same features that the Prochuck court found relevant when deciding that trading within an RRSP does not constitute a business.

But perhaps the CRA’s treatment of TFSAs finds justification from the fact that TFSA funds remain tax free even after the account holder withdraws.

Tax Tips

Based on the methodology that the CRA employs, your status as an amateur investor does not guarantee your escaping a tax audit. That is, while professional investors trading within a TFSA seem a more likely target, amateur investors generating large balances with a frequent-trading strategy may find themselves subject to CRA tax snooping.

The difference between a tax-free savings account earning taxable business income and one earning non-taxable investment income turns on the specific facts of each case. Moreover, the courts have not yet been asked either to determine precisely when a TFSA “carries on a business” or whether Prochuck’s treatment of RRSPs should also apply to TFSAs.

If your exposure to a TFSA tax audit concerns you—or if you’re already the subject of a TFSA audit—consult one of our expert Canadian tax lawyers today.

The information is thought to be current to date of posting. Income tax law changes frequently and content may no longer reflect the current state of the law. This document is not intended to create an attorney-client relationship. You should not act or rely on any information in this document without first seeking legal advice. This material is intended for general information purposes only and does not constitute legal advice. If you have any specific questions on any legal matter, you should consult a professional legal services provider.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Contact the Author?
Click here to email the Author
In Association with
In Partnership with
Other Canada Advice Centres
Competition and Antitrust
Mergers and Acquisitions
Labour and Employment
More Advice Centers
Useful Resources
Forms available to download for income tax filing in Canada.
Hear David J. Rotfleisch discuss timely and highly topical tax matters during appearances and interviews with specialist publications.
Useful explanatory videos of income tax matters.
The following questions and answers are based on the proposed measures that were announced on December 7, 2015.
The official Government website of the CRA.
This guide is for any person who deals with the Canada Revenue Agency (CRA). The guide gives you information on the 16 rights set out in the Taxpayer Bill of Rights and explains what you can do if you believe that the CRA has not respected your rights.
The Office of the Taxpayers' Ombudsman (OTO) works to enhance the Canada Revenue Agency's (CRA) accountability in its service to, and treatment of, taxpayers and benefit recipients through independent and impartial reviews of service-related complaints and systemic issues.
Ontario personal income tax is an annual tax collected from individuals who are Ontario residents on the last day of the tax year or have income earned in Ontario for the tax year.
The following documents provide instructions for filing your 2015 income tax return.
If you earned income in B.C. or operated a Corporation with a permanent establishment in B.C. last year you need to file an income tax return. Find out when you need to file your income tax return, and if any tax credits or rebates apply to you.
Generally, a corporation must file an Alberta corporate income tax return (AT1) for each taxation year during which it has a permanent establishment in Alberta.
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions