10 October 2014 APFF Roundtable, 2014-0538221C6 F - Day Trading in RRSP

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146(4) 146.3(3)

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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.

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 »)

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Text of Severed Letter

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principales Questions: 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 Adoptée: The Prochuk case does not change our position regarding day trading in RRSP trust.

Raisons: 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.

TABLE RONDE SUR LA FISCALITÉ FÉDÉRALE DU 10 OCTOBRE 2014
APFF - CONGRÈS 2014

Question 2

Spéculation sur séance dans un REER

L'ARC a déjà mentionné dans l'interprétation technique 2009-0340431E5 (footnote 1) que les activités de spéculation sur séance exercées dans le cadre d'une fiducie régie par un régime enregistré d'épargne-retraite (« REER ») constituent généralement l'exploitation d'une entreprise et que la fiducie aura alors un impôt à payer sur son revenu imposable provenant de l'exploitation de cette entreprise.

À la lecture du paragraphe 146(4) L.I.R., l'honorable juge Johanne D'Auray a toutefois conclu récemment dans l'arrêt Prochuk (footnote 2) que les activités de spéculation sur séance effectuées dans le cadre d'un REER ne constituent pas l'exploitation d'une entreprise imposable.

[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 à l'ARC

Dans les circonstances, est-ce que l'ARC reconnaît l'arrêt Prochuk de telle sorte que les activités de spéculation sur séance effectuées dans le cadre d'une fiducie régie par un REER (« fiducie-REER ») ne constituent pas l'exploitation d'une entreprise imposable conformément au paragraphe 146(4) L.I.R., et ce, contrairement à l'interprétation technique du 18 janvier 2010?

Réponse de l'ARC

Dans le cadre de l'arrêt Prochuk, le juge devrait déterminer quelle était la nature de la perte encourue par M. Prochuk : une perte au titre d'un placement d'entreprise ou une perte en capital. Pour ce faire, la Cour a dû évaluer si M. Prochuk faisait le commerce des valeurs mobilières.

La perte en question était relative à un investissement dans un fonds d'opération sur devises étrangères auprès de Sabourin and SunGroup of Companies (« SSGC »). Ce placement n'était pas détenu par une fiducie-REER. Cependant, parmi ses arguments, M. Prochuk a soutenu « qu'il avait passé sa vie à faire le commerce des valeurs mobilières et que, depuis 2000, il avait exploité une entreprise avec son REER. » Selon lui, il a « agi à l'égard de l'investissement auprès de SSGC de la même manière que pour les autres placements qu'il avait faits dans son REER. »

Nous comprenons que le juge a tranché cet argument en concluant que le fait d'effectuer des opérations sur valeurs mobilières dans le cadre d'une fiducie-REER n'est pas un élément pertinent lorsque vient le temps d'analyser si les transactions effectuées par un particulier à l'extérieur de la fiducie-REER sont assimilables à l'exploitation d'une entreprise. Nous sommes d'avis que ces commentaires ne sont pas pertinents pour déterminer si une fiducie-REER exploite ou non une entreprise.

Par conséquent, l'ARC est toujours d'avis que des activités de spéculation sur séance peuvent constituer l'exploitation d'une entreprise et qu'il est possible que cette entreprise soit exploitée par une fiducie-REER. Les conséquences découlant de l'exploitation d'une entreprise par une fiducie-REER sont identifiées à l'alinéa 146(4)b) L.I.R.

Ces conséquences sont une exception à la règle générale qui veut qu'aucun impôt ne soit payable en vertu de la partie I de la L.I.R. par une fiducie-REER sur son revenu imposable pour une année d'imposition. En effet, l'alinéa 146(4)b) L.I.R. indique, entre autres, que dans tous les cas qui ne sont pas visés à l'alinéa 146(4)(a) L.I.R, si la fiducie-REER a exploité une entreprise au cours de l'année, un impôt est payable sur l'excédent

(i) du montant (« montant déterminé) qui constituerait le revenu imposable de la fiducie-REER pour l'année si elle n'avait pas tiré de revenu, ni subi de perte de sources autres que l'entreprise

sur

(ii) la partie de ce montant déterminé qu'il est raisonnable de considérer comme un revenu provenant soit de placements admissibles pour la fiducie-REER, soit de la disposition de tels placements.

Le sous-alinéa 146(4)(b)(ii) L.I.R. a pour conséquence d'étendre l'exonération d'impôt d'une fiducie-REER à son revenu d'entreprise qui est tiré soit d'un placement admissible pour elle, soit de la disposition de ce placement. Ceci signifie que si une fiducie-REER entreprend des activités de spéculation sur séance, elle n'aura pas d'impôt à payer sur le revenu provenant de cette entreprise à condition que les activités de cette entreprise soient limitées à l'achat et la vente de placements admissibles tel que le définit le paragraphe 146(1) L.I.R.

Lorsque la fiducie est régie par un fonds enregistré de revenu de retraite (fiducie-FERR), le paragraphe 146.3(3) L.I.R. prévoit des règles similaires à celles énoncées au paragraphe 146(4) L.I.R. qui sont applicables aux fiducies-REER.

Lorsqu'une entreprise est exploitée par une fiducie régie par un compte d'épargne libre d'impôt (fiducie-CELI), le paragraphe 146.2(6) L.I.R. prévoit, entre autres, que la fiducie-CELI devra payer l'impôt prévu par la partie I de la L.I.R. sur son revenu imposable provenant de cette entreprise. Pour une fiducie-CELI, le revenu d'entreprise qui est tiré soit d'un placement admissible pour elle, soit de la disposition de ce placement, ne constitue pas une exception à cette règle. De plus, l'alinéa 146.2(6)c) L.I.R., indique que le revenu de la fiducie-CELI doit être calculé compte non tenu du paragraphe 104(6) L.I.R.

Catherine Ayotte
819-243-7306
2014-053822

FOOTNOTES

En raison des exigences de nos systèmes, les notes de bas de page contenues dans le document original sont reproduites ci-dessous:

1 AGENCE DU REVENU DU CANADA, interprétation technique 2009-0340431E5, 18 janvier 2010.
2 2014 TCC 17 (C.C.I.) (« Prochuk »)

Summaries

Summary Under

Tax Topics - Income Tax Act - Section 146 - Subsection 146(4) - Paragraph 146(4)(b)

RRSP/RRIF day-trading of qualified investments is exempt

Does CRA accept comments in Prochuk for the proposition that day trading in an RRSP trust does not result to carrying on a business for the purpose of 146(4)b)?

After noting that the case did not change its position that day trading in an RRSP was a business (as the conclusion reached in the case was limited to day trading in an RRSP not being a relevant factor to determining whether an individual is carrying on a business outside of the plan), CRA then paraphrased s. 146(4)(b) and stated (TaxInterpretations translation):

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… .

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10 October 2014 APFF Roundtable, 2014-0538221C6 F - Day Trading in RRSP

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