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Discussion Starter #1
Sorry, I wasn't sure if this belongs to the investing or taxation forum, but it seems most relevant to taxation.

The Situation:
Let's say I decided to quit my day job since i'm nearing retirement anyways. And I plan to just live off my investments profits (mostly growth and dividend stocks) in both my sheltered and unsheltered accounts. Of course i will be trading at least a few times a week since i have so much time on my hands now.

The Questions:
1. Recently i read about CRA going after traders earning huge profits in their TFSA. According to CRA, those profits made within TFSA are not tax-free and should be taxed as income. So this is it? If I do this full-time, my profits in TFSA and RRSP are all taxable income???

2. What about my profits in unsheltered accounts? These had always been reported and taxed as capital gains. If i quit my job and do this full-time for myself, i have to report these profit as income as well???
BTW i do not short stocks.

I tried to research this as much as possible, but it doesn't seem like anyone has a straight answer for me. Even my accountant is dodgy but i don't blame him since he's not a tax lawyer.
 

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There are some cases that are more black and white. If you day trade, making dozens of trades a day, flipping securities many times quickly for small gains, then that could easily be considered a full time job. On the other hand, if you are trading a few times a week to make adjustments to your portfolios, then you are clearly investing for long term gains. I'm not a tax lawyer, but I would say that you could even be trading a few times every day and still easily argue you are not doing it for full time employment. But if some point you find yourself, in your retirement, at the computer monitoring stocks 6 hours a day and making 10-20 trades a day, that you probably aren't retired, and shouldn't be surprised if you get a tax bill.

One option to consider would be that if you do want to trade very actively, that you create a separate account with a subset of your assets such that you are not exposing all of your gains to such a liability; even in such a case, you could point to your active account and the other accounts would be considered more of a traditional long term asset. By the way, the TFSAs that are targeted usually have assets greater than $500k and in many cases, more than $1M, achieved through sometimes questionable schemes, or through thousands of trades. They aren't someone getting lucky off a few stocks. Finally, if you don't have a lot of pension or investment income in any case, you may find that full time income is not taxed high anyway. But you probably might want to invest in professional advice for your situation and find out what the lower and upper bounds of reasonable would be for your case.
 

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Discussion Starter #3
doctrine, thanks for your thoughtful reply. I did consider segregating my funds into a separate account but I'm not sure if CRA cares about any self-imposed segregation. From what I heard from individuals who had battled CRA (and won/lost), the CRA auditors are human too and as cases drags on, they seemingly develop personal vendettas and will dig up absolutely everything else that are not part of the subject of challenge and start laying down new charges. Most taxpayers would just give up and settle because CRA has unlimited access to highly seasoned legal resources while citizens don't.

Another option i did considered is to setup a CCPC to be my investment vehicle. So that CCPC would actively invest and get taxed as a business tax rates which are rightfully much lower than personal tax rates. When I need to, I would then draw a dividend. But this way it seems like my gains would be double-taxed. First as business income, then second as personal dividends.

I wonder if other readers here have had to do any such segregation to live off their investments. How did you do it?
 

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The majority of us don't actively trade to live off our investments. We build portfolios over time that become big enough to collect the dividends and interest, and every now and then crystallize capital gains on a holding that has rocketed up. I make 5-10 trades a year maximum in recent years (as little as 2-3 some years), and perhaps at most 25-30 in a busy year of accumulation or tax loss swaps in 2008=2009.
 

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... 1. Recently i read about CRA going after traders earning huge profits in their TFSA. According to CRA, those profits made within TFSA are not tax-free and should be taxed as income. So this is it? If I do this full-time, my profits in TFSA and RRSP are all taxable income???
The article I read said this affected the TFSA only.

I doubt the gov't or CRA would bother for an RRSP as the RRSP/RRIF withdrawals are taxed as income. They aren't losing anything versus the TFSA.


... 2. What about my profits in unsheltered accounts? These had always been reported and taxed as capital gains. If i quit my job and do this full-time for myself, i have to report these profit as income as well???
Depends on whether you meet enough of the criteria to flag you are operating a business instead of someone investing for their retirement.
http://www.taxtips.ca/personaltax/investing/taxtreatment/capitalorincome.htm

Note that it isn't all bad news. The capital gains investor can only use a capital loss to reduce capital gains. A business loss however, can reduce business income *or* any other income.


Cheers
 

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... One option to consider would be that if you do want to trade very actively, that you create a separate account with a subset of your assets such that you are not exposing all of your gains to such a liability;
I did consider segregating my funds into a separate account but I'm not sure if CRA cares about any self-imposed segregation.
The tax tips article as well as other sources has said things along the lines of:
It is possible that a taxpayer may have some securities transactions which are capital transactions, and in the same year have other securities transactions which are income transactions. For example, a day trader could have two investment accounts, one for day trading, and one for investments which are not frequently traded, and are held as long term investments.
It would seem that separation of accounts to set the tax treatment is relatively normal.


Another option i did considered is to setup a CCPC to be my investment vehicle. So that CCPC would actively invest and get taxed as a business tax rates which are rightfully much lower than personal tax rates. When I need to, I would then draw a dividend. But this way it seems like my gains would be double-taxed. First as business income, then second as personal dividends.
One of the things the gov't is reported to be drafting legislation to change is to separate the CCPC's that are an active business from the ones the only hold investments to avoid personal tax rates for the business tax rates. From what I recall of the article, your CCPC sounds like the type the gov't is looking to reset to personal tax rates.

Here is the link ... http://canadianmoneyforum.com/showthread.php/118466-Proposed-Crackdown-on-Corporate-Taxes-2017

Cheers
 
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