Principal Issues: Whether CRA accepts the comments in Prochuk v. R. 2014 D.T.C. 1050 that day trading in RRSP trust does not result to carrying on a business for the purpose of 146(4)b)?
Position: The Prochuk case does not change our position regarding day trading in RRSP trust.
Reasons: In our view, the conclusion reached by the court is limited to the fact that trading in a registered plan is not a relevant factor to determine whether an individual is carrying on a business outside of a plan.
FEDERAL TAXATION ROUNDTABLE 10 OCTOBER 2014
2014 APFF CONFERENCE
Question 2
Day Trading in RRSP
The CRA has already stated in Technical Interpretation 2009-0340431E5 (footnote 1) that day trading activities conducted in a registered retirement savings plan ("RRSP") trust generally constitute the carrying on a business and the plan will then have a tax liability on its taxable income from the carrying on of that business.
Pursuant to subsection 146(4), however, Judge Johanne D'Auray recently concluded in Prochuk (footnote 2) that RRSP day trading does not constitute the carrying on of a taxable business.
[45] Investments within an RRSP have to be « qualified investments » as defined by the Act. …
[47] A person gaining business income from trading has to report all his business income on a yearly basis, and his profit will be determined pursuant to section 9 of the Act. By contrast, since the funds accumulated in an RRSP do not attract tax, an individual is subject to taxation on them only when he withdraws them from the RRSP. …
[48] From the above, it can be seen that the Act treats an individual who trades within his RRSP differently than a taxpayer who is in the business of trading. For this reason, trades within an RRSP are not relevant in deciding whether an individual is in the business of trading.
[51] Accordingly, I am satisfied that trading within an RRSP does not amount to carrying on the business of trading.
Question to CRA
In the circumstances, does the CRA recognize the Prochuk decision in such a way that day trading activities carried out in a trust governed by an RRSP ("RRSP trust") do not constitute the carrying on of a taxable business pursuant to subsection 146(4), contrary to the technical interpretation of January 18, 2010?
CRA response
In Prochuk, the judge had to determine the nature of the loss Mr. Prochuk incurred: a business investment loss or a capital loss. To do so, the Court had to assess whether Mr. Prochuk was trading in securities.
The loss involved an investment in a foreign exchange currency fund with the Sabourin and Sun Group of Companies (“SSGC”). This investment was not held by an RRSP trust. However, among his arguments, Mr. Prochuk argued that “he had spent his life trading and since 2000, had run a business within his RRSP.” In his view, he “acted in the same manner with respect to the SSGC investment as he did with respect to other investments within his RRSP.”
We understand that the judge settled this argument by concluding that trading securities within an RRSP is not relevant in deciding whether trades involving an individual outside an RRSP are comparable to carrying on a business. We are of the view that these comments are irrelevant in determining whether or not an RRSP trust carries on a business.
Consequently, the CRA is still of the view that day trading may constitute the carrying on of a business and that it is possible that such a business may be carried on by an RRSP trust. The consequences of carrying on of a business by an RRSP trust are identified in paragraph 146(4)(b).
These consequences are an exception to the general rule that no tax is payable under Part I of the Act by an RRSP trust on its taxable income for a taxation year. In particular, paragraph 146(4)(b) indicates, among other things, that in any case not described in paragraph 146(4)(a), if the RRSP Trust has carried on any business in the year, tax is payable on the amount, if any, by which
(i) the amount that its taxable income for the year would be if it had no incomes or losses from sources other than from that business or those businesses, as the case may be,
exceeds
(ii) such portion of the amount determined under subparagraph 146(4)(b)(i) in respect of the trust for the year as can reasonably be considered to be income from, or from the disposition of, qualified investments for the trust;
Subparagraph 146(4)(b)(ii) has the effect of extending the tax exemption of an RRSP trust to its business income that is derived either from a qualified investment for the RRSP trust or from the disposition of that investment. This signifies that if an RRSP trust carries on speculative day trading activities, it does not have income tax payable on its income derived from its business on condition that the activities of the business are limited to the purchase and sale of qualified investments as defined under subsection 146(1).
Where the trust is governed by a registered retirement income fund (RRIF trust), subsection 146.3(3) provides rules similar to those set out in subsection 146(4) which are applicable to RRSP trusts.
Where a business is carried on by a trust governed by a tax-free savings account (TFSA trust), subsection 146.2(6) provides, inter alia, that the TFSA trust will be required to pay tax under Part I of the Act on its taxable income from that business. For a TFSA trust, business income that is derived either from a qualified investment for the TFSA or from the disposition of that investment is not an exception to this rule. In addition, paragraph 146.2(6)(c) states that the TFSA trust income must be computed without reference to subsection 104(6).
Catherine Ayotte
819-243-7306
2014-053822
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 Canada Revenue Agency, Technical Interpretation 2009-0340431E5, January 18, 2010.
2 2014 TCC 17 (« Prochuk »)