Qualified and Non-Qualified Investments
Not all assets are eligible to reap the tax-sheltered benefits of TFSAs. TFSAs are required to limit their holdings to qualified investments. This is a fancy way of defining investment assets that will not be taxed in registered accounts.
Qualified investments include:
- Mutual Funds*
- Guaranteed investment certificates*
- Securities that are listed on a designated stock exchange in Canada and the US**
- American Depository Receipts
*These investment types are not currently supported on Wealthsimple Trade
**U.S.-listed securities may still be subject to non-resident withholding tax.
Non-qualified investments, as well as previously qualified investments that become non-qualified, can be subject to tax when acquired within a TFSA.
Which types of investments are considered non-qualified?
Non-qualified investments are excluded from the tax-sheltered benefits of a TFSA. These include:
- Shares of a private organization
- Assets that do not trade on a designated stock exchange
- Assets that are traded over-the-counter (OTC)*
* Assets that trade OTC are only considered non-qualified if they are not cross-listed on a designated stock exchange.
That said, there may be cases where a previously qualified investment becomes non-qualified. This would include the following circumstances:
- Assets that are delisted from a designated exchange and trade over-the-counter (and are not cross-listed on a designated exchange)
- Assets that are delisted from a designated exchange and trade on a non-designated exchange
- Assets that are acquired by a private organization
What do I do if I hold a non-qualified asset in my TFSA?
In some circumstances, the CRA will refund the tax payable on non-qualified investments in a TFSA. In order to qualify for the refund, the investment must be removed from the TFSA before the end of the calendar year. You can read more about this process in this article published on the CRA website.
There can be tax consequences for holding non-qualified investments in your TFSA and moving the non-qualified asset out of your TFSA should be strongly considered.
Will Wealthsimple notify me if one of my TFSA positions becomes non-qualified?
We will notify you by email if one of your TFSA positions becomes non-qualified.
A prohibited investment is an investment where the TFSA account owner has a close connection to the investment - not a sentimental connection because you have owned the security for a long time, but more of a legal type of connection or relationship.
Prohibited investments are also not eligible to be held in a TFSA. You can read more about what the CRA considers to be a prohibited investment in this resource from the CRA website.
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Trading assets within a TFSA
In some cases, income earned from trading can be considered to be business income, which is eligible to be taxed by the CRA.
The CRA does not have a limit of an acceptable number of trades that you can make within a TFSA, but they reserve the right to audit the activities within your account if it appears that individuals are engaging in inappropriate trading activities (i.e. if it appears that you are attempting to earn your living by trading in your TFSA).
If you have additional questions on this, we recommend speaking to a tax professional.