When A Tax-Free Savings Account (TFSA) Is A Business & Stripped Of Tax Benefits: A Case Comment On Ahamed v The King, 2023 TCC 17

• Jurisdiction: Canada
• Law Firm: Rotfleisch & Samulovitch P.C.
• Subject Matter: Finance and Banking, Employment and HR, Tax, Financial Services, Retirement, Superannuation & Pensions, Income Tax, Capital Gains Tax
• Author: Mr David Rotfleisch
• Published date: 08 March 2023

In 2009, the Tax-Free Savings Account ("TFSA") program was introduced by the federal government of Canada as a means to allow Canadian families and individuals to more responsibly plan for retirement or significant life purchases. As of 2009, Canadian tax residents over 18 years old have been entitled to establish a TFSA with a registered issuer in Canada. Unlike other registered savings plans like a Registered Retirement Savings Plan ("RRSP"), a contributor to a TFSA is not entitled to deduct those contributions against income in that same year. Instead, per Canada's TFSA rules, any income earned within a TFSA will be earned on a tax-free basis, and any withdrawals made from a TFSA by its holder will also be received tax-free. As a result, a TFSA holder does not pay any tax on interest, dividends, capital gains or other income that accumulates within a TFSA.

A TFSA is often set up as an arrangement in trust with a registered issuer, such as a financial institution or credit union. In such cases, additional restrictions apply on how that TFSA may be managed, what contributions can be made to the account, and in particular when the income earned in that TFSA may become taxable. Specifically, under subsection 146.2(6) of the Canadian Income Tax Act, the income earned in a TFSA trust may be taxable where that TFSA trust carries on a business through its activities including trading activities. In the CRA's published views, certain activities like foreign currency trading, option writing and excessive stock trading are business activity which render the income from those sources taxable in the TFSA.

The case of Ahamed v The King, 2023 TCC 17 ("Ahamed") demonstrates the potential risks in how excessive trading activity may deprive a Canadian taxpayer of the tax benefits a TFSA can offer. The ruling in Ahamed is also important for Canadian taxpayers because it represents the first time the Tax Court of Canada has been asked to determine precisely when a TFSA "carries on a business" within the meaning of the phrase for Canadian tax law purposes. While the experienced Canadian tax litigation lawyer for the taxpayer launched many creative and novel arguments concerning the legislative scheme for TFSAs and the policy purposes behind extending tax exemption to TFSA trusts, the Tax Court of Canada was unsympathetic to the taxpayer's argument. The Tax Court of Canada ultimately concluded the taxpayer had indeed carried on business activities through the TFSA on the traditional test, rendering that income taxable, and concluding that even on a generous reading of the law and its history the taxpayer's argument ought to fail. This article will begin by briefly exploring the nature of statutory interpretation in Canada and the various rules that courts will consider when left to interpret an ambiguous provision of law. This article will then briefly explain the facts involved in the taxpayer's appeal, and the reasons why the court ultimately rejected the taxpayer's presented interpretation of the law. This article will conclude with some pro tax tips from our top Toronto tax lawyers and some frequently asked questions concerning the tax treatment of TFSA trading activities.

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