TFSA Millionaires Are Learning They Can Still Be Taxed

If you day trade stocks like Shopify (TSX:SHOP) in a TFSA, you may be taxed.

| More on:

Ah, the tax-free savings account (TFSA). Who doesn’t love it? With thousands in annual contribution room, the TFSA lets you keep 100% of your stock market returns forever… right?

Well, not quite. Once you put your money into a TFSA, the CRA can find out that it’s there. TFSAs are administered by Canadian brokers, who report account data to the agency. If the CRA finds out that you’ve been breaking the account rules, you may very well be taxed.

For many TFSA millionaires, it’s a lesson they’ve had to learn the hard way. There have been several cases of Canadians running up their TFSA balances into the millions, only to have the CRA come after them for tax money. One trader named ‘John’ ran up a $1.25 million balance and received a CRA inquiry.

It might not seem fair, but the underlying rationale is sound. The TFSA was designed to shelter passive savings. It was not built for day trading. If you spend all day in front of a computer trading options, you look more like a business owner than a passive stockholder. In the CRA’s eyes, you’re not using the TFSA as intended.

How to avoid being taxed for day trading in your TFSA

There are several ways to avoid being taxed for day trading in your TFSA. The most obvious one is to simply buy and hold stocks, rather than attempt to trade them frequently. Studies show that less than 1% of people who try day trading ever make money at it. Meanwhile, countless investors make money sitting on diversified portfolios, such as index funds. The “buy and hold” portfolio strategy makes sense, is profitable, and makes it harder for someone to accuse you of running a day trading business. It’s a no-brainer.

We can illustrate the wisdom of the “buy and hold” strategy by considering the case of Shopify Inc (TSX:SHOP). Shopify stock has done incredibly well since its IPO. SHOP stock has risen 2,971% in the markets. The e-commerce platform has grown its profit by over a thousand percentage points. It was for a time the largest publicly traded company in Canada.

By simply buying and holding Shopify stock from 2019 or earlier, you’d have done well.

Major volatility

However, Shopify’s run has been very volatile. There have been several 10% daily swings in its price. There was one point when the price declined 82% in a few months. Basically, there have been plenty of opportunities to lose money in Shopify stock. As the legendary Howard Marks says, it’s possible to earn sub-par returns in great stocks by trading in and out of them too often. That’s a lesson most day traders learn the hard way.

And if you do succeed in day trading? Beware the CRA. If you day trade options and realize superior returns, that’s when the tax agency could come knocking. So, day trading in a TFSA is risky no matter what. If you’re like most day traders you’ll lose money. If you’re in the elite 1%, you may lose your TFSA account benefits. Ouch.

Foolish takeaway

The bottom line on TFSAs is that they can save you a lot of money if you use them right. Hold a diversified TFSA portfolio and you’ll probably do well. Follow an ill-advised strategy, such as day trading, and you might get burned.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Andrew Button has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Shopify. The Motley Fool has a disclosure policy.

More on Tech Stocks

Person uses a tablet in a blurred warehouse as background
Tech Stocks

2 Canadian AI Stocks Poised for Significant Gains

Here are two top AI stocks long-term investors may want to consider before the end of the year.

Read more »

woman looks at iPhone
Dividend Stocks

Retirees: Is TELUS Stock a Risky Buy?

TELUS stock has long been a strong dividend provider, but what should investors consider now after recent earnings?

Read more »

Car, EV, electric vehicle
Tech Stocks

Better Electric Vehicle (EV) Stock: Magna International vs. Rivian

Rivian (NASDAQ:RIVN) is growing quickly, but Magna International (TSX:MG) is more profitable.

Read more »

Canadian Dollars bills
Tech Stocks

Invest $30,000 in 2 TSX Stocks, Create $9,265.20 in Passive Income

If you're only going to invest in two TSX stocks, invest in these top choices that have billionaires backing them…

Read more »

Start line on the highway
Tech Stocks

3 Beginner-Friendly Stocks Perfect for Canadians Starting Out Now

Are you new to investing in the stock market? Here are three Canadian companies that are perfect to get you…

Read more »

Digital background depicting innovative technologies in (AI) artificial systems, neural interfaces and internet machine learning technologies
Tech Stocks

Step Aside, BlackBerry: This AI Stock Is the Real Deal for Canadian Investors

Down 60% since 2016, BlackBerry stock remains a high-risk investment for investors due to its tepid sales and negative profit…

Read more »

cryptocurrency, crypto, blockchain
Tech Stocks

2 Stocks to Hold Instead of Bitcoin in 2025

Investors with a high-risk appetite can consider increasing exposure to stocks such as MicroStrategy and Coinbase to benefit from the…

Read more »

Asset Management
Dividend Stocks

3 Safe Canadian Stocks to Buy Now and Hold During Market Volatility

These Canadian stocks offer the perfect trio for investors looking for growth, income, and long-term holds.

Read more »