Principal Issues: [TaxInterpretations translation] What are the tax consequences related to day trading activities when carried out by a trust governed by an RRSP or TFSA? What is the responsibility of the trustee?
Position: These activities are generally the carrying on of a business and the RRSP trust will have a tax liability on its taxable income from carrying on the business. The trust has to file a T3 income tax return and the trustee has to make sure that this return is filed.
Reasons: Wording of: 146(4)(b); 150(1)(c); 162(3); 150(3)
2009-034043 XXXXXXXXXX Catherine Ayotte, Notary, M.Fisc January 18, 2010
Dear Sir,
Subject: Day trading within an RRSP or TFSA
This is further to your letter of September 4, 2009, in which you asked us to confirm the tax consequences related to day trading activities (Endnote 1) when carried out by a trust governed by a registered retirement savings plan (RRSP) or a tax-free savings account (TFSA).
Please note that unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
It appears to us that the situation described in your letter may constitute an actual situation involving taxpayers. As explained in Information Circular 70-6R5, it is not the Directorate's practice to comment on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involves a specific taxpayer and a transaction, you should provide all relevant facts and documentation to the appropriate Tax Services Office for its views. However, we are prepared to provide the following general comments.
Generally, the Canada Revenue Agency (CRA) considers day trading activities to be carrying on a business (endnote 2). The tax consequences of carrying on a business by a trust governed by an RRSP or TFSA include the following:
- A trust governed by an RRSP or TFSA that carries on a business will have tax payable under Part I of the Act on its taxable income from carrying on the business. To this effect, the trust will have to file a T3 Trust Income Tax and Information Return (Footnote 3).
- Its tax liability will be calculated by virtue of subsection 122(1), i.e., at the tax rate for inter vivos trusts that corresponds to the top marginal rate applicable to individuals.
- Losses incurred by this trust could not be allocated to the RRSP annuitant or TFSA holder.
- This trust will be eligible for the deduction under paragraph 104(6)(b) only to the extent that it has amounts of income that have become payable to a beneficiary. This is a question of fact to be determined by reference to the declaration of trust.
- Any benefit paid by such an RRSP trust must be included in computing the annuitant's income by virtue of subsection 146(8) and paragraph 56(1)(h).
By virtue of paragraph 150(1)(c), the income tax return of a trust governing an RRSP or TFSA that has carried on a business must be filed within 90 days from the end of the trust's taxation year. Subsection 150(3) specifies that every agent or other person administering, managing, winding up, controlling or otherwise dealing with the property, business, estate or income of a person who has not filed a return for a taxation year shall file a return in prescribed form of that person’s income for that year. Subsection 162(3) adds that every person who fails to file a return as required by subsection 150(3) is liable to a penalty.
In addition, we would like to bring to your attention that on October 16, 2009, the Department of Finance issued News Release 2009-099 (Endnote 4) which aims to tighten the rules applicable to TFSAs by proposing new measures to stop transactions and tax planning involving TFSAs that are considered abusive. These measures include a 100% tax rate on certain income earned in a TFSA and a prohibition on asset transfer transactions between a TFSA and other registered or non-registered accounts. These measures are applicable as of October 17, 2009. The CRA will carefully review unusual asset transfer transactions entered into before October 17, 2009 with TFSAs and will apply the relevant provisions of the Act to counter abusive tax planning where necessary. The CRA encourages any taxpayer who has engaged in such planning to use the voluntary disclosure program.
We hope that our comments are of assistance.
Best regards,
Ghislain Martineau
Manager
Financial Sector and Exempt Entities Section
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.
ENDNOTES
1 The English term for "spéculation sur séance" is "day trading".
2 For more information regarding the characterization of income from securities transactions, see ¶s 10, 11 and 18 of Interpretation Bulletin IT-479R , available on the CRA Internet site at http://www.cra-arc.gc.ca/E/pub/tp/it479r/READ-ME.html.
3 For more information on this topic, see the T3 Trust Guide, available on the CRA website at http://www.cra-arc.gc.ca/E/pub/tg/t4013/ READ-ME.html.
4 Available on the Department of Finance Internet site at http://www.fin.gc.ca/n08/09-099-eng.asp .