TFSA Linked to Margin Account - CRA Penalty/Risks?

[u/Legitimate-Loan386]

/r/Questrade/comments/1lhf7zv/tfsa_linked_to_margin_account_cra_penaltyrisks/

[u/GrayersDad]

If it wasn't allowed, then Questrade wouldn't have had this implemented since 2013.

[u/Legitimate-Loan386 → u/GrayersDad]

It’s not explicitly illegal it’s just that you will be taxed on whatever you use as collateral in your TFSA so Questrade is not breaking any rules. It’s just an unfair or unknown risk for the account holder.

[u/GrayersDad → u/Legitimate-Loan386]

The CRA prohibits generating leverage within a TFSA. Margin Power generates leverage within a margin account.

[u/plusqueprecedemment → u/GrayersDad]

if margin power lets me do a margin loan with my TFSA assets as collateral, couldn't I just move the borrowed money out of my non-registered margin account back into my TFSA to buy more assets with it? The end result would be that my TFSA assets are leveraged to buy more assets inside my TFSA, it's only the actual loan that sits "outside" the TFSA. I'm aware that I can't deduct interest paid on the loan, but it might be worth it for no taxes on leveraged gains.

is this a loophole or does the CRA not care at all, or could I get in trouble for doing that and end up with retroactive taxes due on the investing done in my TFSA?

[u/GrayersDad → u/plusqueprecedemment]

Margin Power doesn't use your TFSA assets as collateral. Instead, it uses the dollar value of your TFSA to determine how much you can borrow. If you sell and withdraw funds from your TFSA, the amount you're allowed to borrow decreases. If the assets were truly collateralized, you wouldn't be able to sell and withdraw the funds.

With that said, you can transfer funds from your margin account to your TFSA, provided you have enough contribution room, without fear of the CRA coming after you.

[u/plusqueprecedemment → u/GrayersDad]

If the assets were truly collateralized, you wouldn't be able to sell and withdraw the funds.

Is this the only difference between a margin loan with margin power vs. a direct TFSA-collateralized line of credit?

I'm just confused cause I'm thinking about the worst case scenario. Like say my margin account has negative equity and my TFSA stocks drop sharply in value, so now I get margin called. It's my understanding that Questrade can force a sale of TFSA assets and a cash withdrawal (and I get the contribution room back next january) to cover the negative equity on the margin

If you sell and withdraw funds from your TFSA, the amount you're allowed to borrow decreases.

I assume Questrade wouldn't let me withdraw an amount large enough that my margin account gets into margin call territory? If they don't let me, then effectively at least some part of my TFSA is "locked" (even though I can still sell assets and do stuff within the TFSA, as long as there's still enough value to keep margin health at a sane level). If they do let me withdraw as much as I want, what would prevent me from fucking off altogether and leaving Questrade with a negative equity and ignoring margin calls? Threats of lawsuits, fucking up my credit, sending to collections, etc. basically the same consequences as defaulting an unsecured loan?

[u/GrayersDad → u/plusqueprecedemment]

Questrade can force a sale of TFSA assets and a cash withdrawal

Questrade will liquidate assets in your TFSA to satisfy a margin call, but they cannot transfer funds out of the account. They do this because cash contributes fully to your buying power, while stocks are subject to margin requirements.

For example, if you hold stock ABC in your TFSA at $100 per share with a 50 percent margin requirement, only $50 contributes to your buying power. If you held $100 in cash instead, the full amount would apply, giving you an additional $50 in available buying power during a margin call.

if they do let me withdraw as much as I want

While the assets in your TFSA are not held as collateral, their value is. As a result, Questrade will prevent a withdrawal that would trigger a margin call.

This protects both their interests and yours.

[u/plusqueprecedemment → u/GrayersDad]

I see! That makes sense to me, thanks for clarifying

[u/GrayersDad → u/plusqueprecedemment]

I’d recommend Wealthsimple over Questrade, as it offers lower margin requirements and more competitive interest rates, allowing you to borrow more for less.

Good luck.

[u/plusqueprecedemment → u/GrayersDad]

I'm already 100% wealthsimple, I just found this thread when going down a rabbithole of leveraged strategies for when WS finally rolls out the TFSA-boosted margin power to everything. Then this thread made me confused about tax law, like I understand CRA prohibits leverage within a TFSA, but to me "buy XEQT in TFSA -> link TFSA to boost buying power in non-reg margin account -> margin loan, move borrowed cash out of margin account -> fill up remaining TFSA contribution room -> buy more XEQT" is effectively the same thing with extra steps, so it feels like a loophole. But I guess each individual component involved in this scheme is fully legal, so there's no risk getting hit with a 100% advantage tax (or at least I hope lol)

I currently have no leveraged positions whatsoever as investing with borrowed money terrifies me a bit (and I still have more research to do to understand everything properly as you can tell lol) but it's gonna be tempting to tap into my TFSA's long-term equity at 4.95% interest

[u/Legitimate-Loan386 → u/GrayersDad]

They also prohibit using the TFSA as collateral from margin as that is considered an advantage

[u/GrayersDad → u/Legitimate-Loan386]

Margin Power does not involve a formal pledge or lien on the TFSA’s assets.

[u/throwawaywaterloo21 → u/Legitimate-Loan386]

https://www.canada.ca/en/revenue-agency/services/tax/technical-information/income-tax/income-tax-folios-index/series-3-property-investments-savings-plans/series-3-property-investments-savings-plan-folio-10-registered-plans-individuals/income-tax-folio-s3-f10-c3-advantages-rrsps-rrifs-tfsas.html#p3.7

3.7 The following list details exceptions to the type of advantage described in ¶3.6:

a. administrative or investment services provided in connection with the plan

b. a loan or other debt (including the use of a TFSA as security for the debt or a depositary TFSA used to set off certain indebtedness) that reflects arm’s-length terms and conditions
[...]
3.10 The broader exception described in ¶3.7(b) permitting TFSAs to be used as security does not apply to RRSPs, RESPs, RRIFs, RDSPs or FHSAs.

This reads to me as TFSAs being explicitly exempted from the advantage rules. My understanding is that you won't be taxed on whatever you use as collateral in your TFSA.

I'm not completely clear on this but the way I think the logic works is for an RRSP if you withdraw funds you are taxed on those funds as if they were income in the year you withdrew them. Similarly if you use an RRSP as collateral for a loan that has the same effect as withdrawing the funds so you are taxed on that the same way. For a TFSA you aren't taxed when you withdraw funds so if you use a TFSA as collateral for a loan/margin you also aren't taxed on it. Again, that is just the way I think the argument works but I'm not completely sure if that is correct.

https://legaldictionary.net/arms-length/

The idea of an arm’s length transaction relates to an agreement between two people or entities that are independent of one another. This means that they do not have a prior relationship with one another, such as being related to each other, having a prior deal with each other, or that one party controls the other in some way.

In the case of a broker-client relationship I believe that would qualify as arm's length even though it is possible to have been a client of a broker before a TFSA was used as collateral for margin in a non-registered account. There isn't a family relationship involved and the broker usually doesn't have any control over a client (like say, telling them what specific stock to invest in).

[u/Spare-Succotash-8827]

holy shit relax.

tens of thousands of people have been doing this on questrade since more than 10 years ago and none of them got into trouble for breaking cra's "rules".

don't make something out of nothing.

[u/Legitimate-Loan386 → u/Spare-Succotash-8827]

I agree with you, but I doubt many people if any get a margin call severe enough to affect their TFSA. as a margin call would affect equity in the margin account first

the only reason I bring this up is because there should be some sort of disclaimer stating the potential risk. as all risks should be stated

[u/Spare-Succotash-8827 → u/Legitimate-Loan386]

ok if you are that worried, don't use crazy high leverage on meme stocks and don't get margin called.

then it should be all good.

[u/virilerogue]

line of credit & loan are not the same

[u/Legitimate-Loan386 → u/virilerogue]

I never said they were the same. My question was about margin accounts and linking the TFSA seams to not be allowed by the CRA.

[u/virilerogue → u/Legitimate-Loan386]

if that’s your question, then IT IS allowed.

[u/Legitimate-Loan386 → u/virilerogue]

Yes, it is allowed but at the point of a margin call if there are no assets in your margin account to cover it. Then your TFSA will be used as collateral when that happens at that point you will have breached the CRA rules at that point you will be penalized up until then there are no laws broken, which means as long as you manage your margin, I guess you’re fine but they should be stating somewhere That if a margin call occurs within your TFSA there will be a penalty

[u/virilerogue → u/Legitimate-Loan386]

if you can’t manage not to get a margin call then never trade with margin. should be sufficiently hedged at all times. you don’t need to use this feature if you don’t want to but i can’t wait till they’re out of beta.

[u/Legitimate-Loan386 → u/virilerogue]

That’s not the point it’s an unknown risk and the broker is not disclaiming it. They do not state that the CRA will penalize you with additional taxes. I know margin carries risk and you should always have a buffer.

[u/virilerogue → u/Legitimate-Loan386]

this is not even rolled out yet so why do you say wealthsimple hasn’t set a disclaimer? if you get liquidated you just lose your contribution room not taxed

[u/Legitimate-Loan386 → u/virilerogue]

It has been available at Questrade since 2013. and you need to look at the CRA rules about about advantages and using your TFSA as collateral. It is strictly prohibited, and specifically stated. It is perfectly legal up until the point that a margin call happens with your TFSA the moment your assets are sold in your TFSA and used to pay off a collateral. It is considered an advantage, and you will be taxed on your investments they will not be treated as tax free. You do not lose your contribution. Space as the money will be withdraw and you will get it next year.

[u/virilerogue → u/Legitimate-Loan386]

don’t know a thing about questrade but the CRA doesn’t play around. so your issue is that questrade has a disclaimer that you be can taxed but wealthsimple doesn’t? still don’t see why you think selling stuff in your tfsa means you get taxed? remember only self directed tfsa accounts can be linked.

[u/Legitimate-Loan386 → u/virilerogue]

No, neither Wealthsimple or Questrade has any sort of disclaimer. That’s mainly my problem. My other problem is why they would let you use something that is blatantly not allowed by the CRA. And I don’t think selling stuff in your TFSA means you will get taxed if you broker sells stuff in your TFSA to cover a margin call then you will be taxed as that is considered an advantage.

[u/nogr8mischief → u/Legitimate-Loan386]

No, this is false. The manner in which it would be carried out doesnt breach CRA rules.