If you are investing withing your TFSA or RRSP there are some important things to keep in mind. The first is to pay close attention to your contribution limits. If you go over your yearly limit, the penalty is 1% of the excess amount per month, going back to when you went over your limit. There is also some seperate tax filing that will have to be done to get it straightened out, these returns start at $250 per year.
The other thing to pay attention to is the type of investment that you are holding within your RRSP or TFSA. Make sure that they are CRA qualified investments. If they are not, they will have to be treated as taxable income. Here is a link to the tax folio from CRA that discusses the types of qualified properties:
On a side note, if you own foreign dividend paying investment within your TFSA, those dividends are taxable income in your hands, and must be reported.
Investment losses incurred within your TFSA & RRSP are not capital losses. Something else that many people do not understand is that if you realize a loss (sell the shares at a loss) within your TFSA or RRSP, you do not get that contribution room back. For example, if you had made an investment of $5000 in shares within your TFSA, and those shares dropped in value to $2000 when you sold them, and withdrew that cash from your TFSA – your withdrawl amount is $2,000. You would get the $2000 in contribution room back in 1 year, but the other $3000 is not counted as a withdrawl, and that contribution room is never recovered.
If you find yourself having frequent buying and/or selling transactions during the year, the CRA can rule that your trading is a business, and therefor subject to regular income tax (100% of gains taxable) rather than being capital in nature, and subject to capital gains tax (50% of gains taxed). Here is a list of behaviours that they look at when making this determination:
- Extensive buying and selling of investment properties, frequent transactions
- Owning the securities for short periods of time
- If the taxpayer has some knowledge of or experience in the securities market
- Part of the taxpayer’s ordinary business is trading in securities
- A substantial amount of the taxpayers’ time is spent investigating and studying the market for future security purchases
- Security purchases are financed primarily with debt or margin
- The taxpayer has made it known or advertised that they are willing to purchase securities
- Securities purchased are speculative in nature and do not pay dividends