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The Tax Free Savings Account is unfair -
As with all actions in life there is the unintended consequence. When the Canadian Government instituted the Tax Free Savings Account (TFSA) it was believed that there would be no major tax repercussions. However, some people have actually made money in their TFSA and that is something that cannot be overlooked at the Canada Revenue Agency. The CRA is miffed that some TFSA holders have made investment or stock trading profits in their accounts and these have not been subject to tax. This is unfair to the CRA.
Their response has been to accuse the holders of those profitable accounts of operating a trading business in their TFSA and that it should therefore be subject to taxation. Let us say that your agree with that. What happens if the holder of the account loses money while operating his trading business in his TFSA? Will the CRA allow the holder to deduct the losses from his personal income? If you believe they will call me and I’ll sell you the greatest penny stock you’ll ever hear of.
There is a clear history of tails I win heads you lose in taxation in Canada. When capital gains tax was originally instituted in 1972 in Canada taxpayers were allowed to deduct their investment losses from their earned income. However it soon became apparent that the vast majority of investors in Canada racked up losses and the treasury was suffering greatly as a result. The tax act was quickly changed to only allow loses to be claimed against gains. The outlook for the current debacle of Canadians earning untaxed income will be to change the rules so that a TFSA that has a profit and made a significant number (undefined) of trades will be deemed to be a business operating within a TFSA. As such the business will be taxable and the losses only chargeable against profits. If upon retirement or emigration you should decide to close your TFSA and have accumulated losses (as most Canadian speculators do) you’ll have to figure out how to withdraw a tax free loss to apply to your cruise.
To avoid all that nonsense the intelligent thing to do is find some high yield interest paying securities and let the magic of compound interest take care of your tax free income. Remember that the Tax Act was never meant to be fair.