Doing so risks having otherwise tax-free income and profits subject to full taxation as business income, along with associated interest and penalties if that income is added to a previous year’s tax return in a subsequent year.
Other registered retirement accounts
Registered retirement savings plans (RRSPs), registered retirement income funds (RRIFs), and similar registered retirement accounts are exempt from the business income taxation of trading.
According to the CRA, “if an RRSP or RRIF were to engage in the business of day trading of various securities, it would not be taxable on the income derived from that business provided that the trading activities were limited to the buying and selling of qualified investments.”
Qualified investments include cash, bonds, guaranteed investment certificates (GICs), stocks, mutual funds, exchange traded funds, warrants and options, foreign exchange, gold and silver, and other listed securities and investment funds.
This day trading exemption for RRSPs may seem like good news at first. But it may be less so when you consider why the CRA exempts these accounts.
Because RRSP accounts are eventually subject to the RRIF minimum withdrawal requirements starting no later than age 72 and are fully taxable on death (unless left to an eligible beneficiary like a spouse or financially dependent minor child or grandchild), the CRA will get their tax eventually. Growing your RRSP or RRIF account by day trading, if you are successful, means a larger tax liability is looming in the future since withdrawals are fully taxable.
It appears to be that the tax-free nature of TFSAs, and the tax-preferred treatment of capital gains (only 50% taxable), causes TFSA and non-registered accounts to be at risk.
Trading within RESPs
Registered education savings plans (RESPs) are registered accounts, which can be at particular risk if an investor is found to be carrying on a business. According to the CRA, “an RESP is revocable pursuant to paragraph 146.1(2.1)(c) [of the Income Tax Act] if it begins carrying on a business.”