[tradingmachine]

I have a pretty high level tax question, but I am hoping people can either answer or help point me to a professional that can help me out.

I currently day trade stocks for a living and after tax (way too much) make about 3 million per annum.

Is it possible for me to start a private mutual fund, pay myself from the fund, but own 100% of the fund in my TFSA. (ie when the private IPO comes out but the whole thing in my TFSA)?

Thanks,

 

[flayto]

Given your stated annual income, wouldn't you be able to afford hiring a tax accountant to better answer this question?

 

[tradingmachine]

Given your stated annual income, wouldn't you be able to afford hiring a tax accountant to better answer this question?

Oh absolutely, which is why I said if someone could point me to someone that is fine. I have no problem paying for the advice. It kind of just took off for me the last couple of years and the accountant I use is an old family friend. I know I have totally out grown him but don't know where to go, unless I just go to one of the big firms.

 

[DrStan]

Starting a mutual fund just to put $5000 a year in a TFSA? This would represent a tiny fraction of your income and would hardly be worth the effort and expense. Is this a joke?

 

[tradingmachine]

Starting a mutual fund just to put $5000 a year in a TFSA? This would represent a tiny fraction of your income and would hardly be worth the effort and expense. Is this a joke?

I think you misunderstood. I would start a mutual fund that I do all the trading in, but it would be owned by my TFSA. So all the shares of the fund would be sold to my TFSA. The fund would leverage its trading history with banks (like I do now) to get funding.

 

[OhGreatGuru]

This is above my pay grade. But the first thing that comes to mind is that it wouldn't meet the definition of a mutal fund in the first place. And secondly are you allowed to hold such an instrument in a registered account like a TFSA. And thirdly wouldn't CRA see it for the tax evasion scam it is?

 

[mrmullen]

I would imagine you would run into the same thing as with an RRSP, you can't buy more then 10% of a company. Might be different if you start a mutual fund but I doubt it.

 

[OhGreatGuru]

Is it possible for me to start a private mutual fund, pay myself from the fund, but own 100% of the fund in my TFSA. (ie when the private IPO comes out but the whole thing in my TFSA)?
There seems to be confusion in your mind between a mutual fund and mutual fund company.

A mutual fund company does not own the assets in the mutual funds it manages - The company is a manager of assets that it holds in trust for the investors. If you "sold" the mutual fund company to your TFSA, all that you would be selling is the managment company you created, not the funds themselves. The funds are still owned by you, the purchaser, outside of your TFSA.

In any case, if you had an IPO for your management company, how could you sell it all to your TFSA, and still call it a "Public" offering? And how would you establish a fair market value for it?

 

[Robillard]

Please note that I am not a lawyer, or an accountant for that matter, though I do know a thing or two about the Income Tax Act.

I don't think that the plan, as you have set it out, is possible. Even if it were, the CRA would probably determine that your plan was abusive. Assuming that the structure was kosher with respect to the rest of the income tax act, there is still the general anti-avoidance rule (GAAR) to contend with. The whole thing stinks of an abusive tax plan, and assuming that you were audited, reassessed, and you objected and filed with the courts, I think that the Tax Court of Canada would let the CRA's assessments stand.

That said, I think it might be interesting to consider the possibilities here. Please note that this is all a speculative thought experiment. Suppose you do set up a mutual fund trust. At creation, the trust has no assets or only nominal assets. The mutual fund trust beneficial ownership (the fund units) are sold to your TFSA, and since the value of the units is nominal, you do not end up over-contributing to the TFSA to purchase the mutual fund trust units. Then to get assets into the mutual fund trust, you loan funds to the trust in exchange for a promissory note. You are also made the manager/trustee of the trust so that you can manage its trading activity. The trust pays you income in the form of interest payments (which would still generate a lot of tax), and distribute the excess earnings to your TFSA, where supposedly they would accrue tax free.

I don't really see how this could work. You don't deal at arm's length with the mutual fund trust since you are also the trustee/manager. I think a bigger problem is that the TFSA can only hold up to 10% of a given share class of a private company, and I think you need to deal with any private company in which your TFSA invests at arm's length. There is also the question as to whether an investment in such a mutual fund trust would be admissible to be held in the TFSA. Any investments in private companies in the TFSA need to always meet the admissibility criteria, unlike an RRSP, in which it only matters when the relevant securities are acquired (if they subsequently become ineligible, then I don't think anything happens). If a private investment in the TFSA is found to not meet the admissibility criteria, then any income generated will be taxed accordingly.

Well, at least it was fun to think about this.

 

[cannon_fodder]

Would it be possible to open up your own corporation and trade within it? I.E. pay corporate tax on your profits rather than personal income tax? You could withdraw the income (as dividends?) to meet your needs while keeping more of the money away from the government.

I have very little tax knowledge (and only on a personal level) but just thought I'd throw that idea out there...

 

[Robillard]

cannon_fodder,
One could do this. Unlike personal income tax rates, corporate tax rates are generally not progressively graduated and the marginal corporate rates can be lower than the top marginal personal income tax rate. So depending upon how much income the business generates, there can be tax advantage to organizing as a corporation compared to a sole proprietorship. Also, dividends are effectively taxed at a lower marginal rate than interest income. This tax efficient business structure issue is a bit too complicated to discuss here, and it depends upon situational factors (also, this is something you might pay an accountant and maybe a lawyer to help set up). That said, there is nothing abhorrent about this sort of tax planning.

Of course, even if you did set up a corporation in which to conduct daytrading, you still could not own the shares in your TFSA because you do not deal with the corporation at arm's length. Rather, you could try; but the CRA would assess tax on the income generated, so there is no point.

 

[ghostryder]

Would it be possible to open up your own corporation and trade within it? I.E. pay corporate tax on your profits rather than personal income tax? You could withdraw the income (as dividends?) to meet your needs while keeping more of the money away from the government.

I have very little tax knowledge (and only on a personal level) but just thought I'd throw that idea out there...

http://www.redflagdeals.com/forums/investments-corporation-810506/#post9715415

 

[leslie]

Second that. Bad idea.

 

[Robillard]

Holding investments for the long term in a corporation is definitely a bad idea, though if the purpose of the corporation was to engage engage in daytrading, it could work. Income from daytrading is treated as active business income instead of investment income (capital gains).

 

[Vancouver CA]

Talk to your current accountant, get them to recommend someone who can handle it. Doesn't seem that hard does it?