More CRA Audits & TFSA Tax Disputes: Insights From Ahamed v HMK

• Jurisdiction: Canada
• Law Firm: Counter Tax Litigators
• Subject Matter: Accounting and Audit, Tax, Audit, Tax Authorities
• Author: Peter Aprile, James Roberts and Natalie Worsfold
• Published date: 14 April 2023

The Canada Revenue Agency may examine your TFSA transactions and argue that you were engaged in the business of trading securities within your TFSA.

When the CRA believes it can justify this argument, it will classify the income earned as business income and issue reassessment notices accordingly. If you attempt to overturn the reassessments solely on the basis the income is exempt, you will fail.

We examine the Tax Court's decision in Canadian Western Trust Company as trustee of the Fareed Ahamed TFSA v. His Majesty the King¹ (Ahamed) to harvest the lessons and provide a few reflections at the end of this article.

Tax Case Summary

In Ahamed, the CRA audited Ahamed's self-directed TFSA trust transactions related to the 2009 to 2012 taxation years. Ahamed worked as an investment advisor who traded speculative junior mining stocks in his TFSA and owned shares for short periods.

The CRA claimed Ahamed carried on a business of trading qualified investments, and the income was subject to Part I tax under subsection 146.2(6) of the Act.

Ahamed argued the provisions in the Act that exempt income earned in an RRSP also exempt income earned in TFSAs. Basically, he asked the Tax Court to reimagine the provisions in a new way that would change Parliament's intention and the text. Ahamed did not present an alternative argument that he was not carrying on business.

Ahamed offered different reasons to support his interpretation of the relevant provisions. For example, he asked the Tax Court to use a 1969 Revenue Canada letter about the RRSP provisions as evidence. He also relied on the Tax Court's obiter statement in Prochuk that "trading qualified investments cannot constitute the 'carrying on of a business' within an RRSP" to argue the same applies to TFSAs.² Justice Spiro rejected Ahamed's legal argument.

Justice Spiro's analysis starts by interpreting subsection 146.2(6) of the Act. The subsection includes the words "carries on one or more business". The text and its meaning are clear. Justice Spiro underscored the Supreme Court's direction to give more weight to the text (over context and purpose) when interpreting legislation.

Also, Justice Spiro examined Parliament's purpose and objectives when drafting legislation. He quoted the Supreme Court of Canada and other sources to highlight that assuming a single purpose oversimplifies Parliament's intention and objectives.

How did Parliament intend to achieve this primary purpose? To answer that question, we must...