TFSA Swaps

[alpha]

 

Thought this was an interesting scheme:

 

https://business.financialpost.com/personal-finance/taxes/woman-who-used-swaps-to-run-tfsa-up-to-200k-from-5k-in-one-year-suffers-triple-loss-in-court-appeal

[Cigarbutt]

Let's go back in time. You're in 2009 and meet the criteria to be deemed a sophisticated investor, make, on average, 14 swap transactions per month for 5 months and move your tax-deferred account from 500$ to 206,615$. All transactions are non-market, with you on both sides of all transactions and all transactions (due to your decision of the price chosen from the day's range) take maximum advantage to avoid paying tax on the differential price no-risk arbitrage opportunity that day.

Then, what do you expect? I would say trouble, at the very least.

 

It does not mean much in a way but her TFSA account went from 206,615$ at the end of 2009 to 220,485$ at the end of 2012. Assuming 2010-2 additional yearly 5000$ contributions, it definitely looks like she lost her momentum when she stopped making swap transactions although I suspect (and this is the sad part) that most of the increase in market value in 2009 was not due to the swap intra-day decision inputs but from market movements.

 

It's a relatively tough decision but, FWIW, I fully agree with it. One has to look into the intent of the law and the intent of the person. I find that the substance of the transactions did contaminate her TFSA account in 2009 and, because of the domino effect, whatever happened after has to be interpreted in the light of the 2009's actions.

 

The CRA has been quite active in some accounts and it has been reported that 80% of the amounts recovered have been related to the "advantage" scenario that is exemplified above. Only a small amount is recovered from what is considered to be day trading activities. FWIW, I've had my share of inquiries and, so far, have been able to walk away free because of extensive documentation and because of an ability to show equivalent or proportional "behavior" in non tax-deferred accounts. There are grey zones but some lines should not be crossed. I submit that Ms. Louie went too far. Dura lex sed lex.

[wachtwoord]

The court decision is outrageous as her swaps were done before the rules banning it were active. In non-banana jurisdictions there's a little thing called legal certainty.

 

Then again the UK once post facto changed the statute of limitations and prostecuted people for (old) crimes on the basis of that.

[SharperDingaan]

Do the same thing with actual sales to/from the market, and there is no issue.

The taxable account simply sells into the market in the morning, and the TFSA buys out of the market (32 days later) in the afternoon. Different dates, different trades, different prices, different 2nd parties, >31 days elapsed, same overall effect.

Point is, don't poke the bear.

 

SD

 

 

[Cigarbutt]

The court decision is outrageous as her swaps were done before the rules banning it were active. In non-banana jurisdictions there's a little thing called legal certainty.

 

Then again the UK once post facto changed the statute of limitations and prostecuted people for (old) crimes on the basis of that.

The legal certainty to indeterminacy spectrum does not preclude the fact that equivalent judgements can be reached in the large majority of decisions whichever theoretical orientation of the Court (European, American or otherwise). Similar conclusions can be reached when comparing the rules-based and the principles-based approaches used by Accounting Boards. If you put emphasis on the principles, you have to infer what the rules could be and if you focus on the rules, you have to infer what the principles must be.

 

Disclosure: Optimization of tax efficiency at the individual level and efficient recuperation of excesses at a systemic level are not mutually exclusive propositions as both can be seen as NPV projects, with the individual being the endpoint despite an inevitable intermediate.

 

In this specific case, it is not a decision but decisions as the tax assessment was maintained in the lower court and the defendant was the appellant for the appeal on that count. The issue is around the "advantage" definition and the reasonable application of anti-avoidance rules (pretty straightforward stuff). A sophisticated investor at the time should have known or realized that the transactions did not meet the intent of the legislator. You may want to take it to the limit, but no further. The investor played with radio-active strategies, repeatedly, and with a difficult to explain disregard for basic principles. No wonder it has been described as a scheme: an organized plan for doing something, especially something dishonest or illegal that will bring a good result for you.

 

 

[cameronfen]

I don't know about Canada, but if a corporation did something akin to this (violating the spirit of the law, not the letter) in the US they would probably get away with it.  Which I think is unfair in how courts rule proper behavior differently for individuals and corporations (due in part to the latter having more high power lawyers). 

[Cigarbutt]

I don't know about Canada, but if a corporation did something akin to this (violating the spirit of the law, not the letter) in the US they would probably get away with it.  Which I think is unfair in how courts rule proper behavior differently for individuals and corporations (due in part to the latter having more high power lawyers).

I'd love to see convincing evidence on this but I feel the same, to some degree. An uncomfortable corollary is that the NPV on a tax scheme or efficiency plans (which may be hard to differentiate at times) may increase significantly despite much larger negative cashflows along the way. The likes of GE, Apple and other corporations have huge inside tax-handling issues departments and some individuals investing in highly sophisticated schemes or pseudo-schemes become eligible to a negotiation process not available to the ordinary citizen when the going gets tough.

As to the playing by the rules concept and the corporate world, I think that the evolution in thinking displayed by Andrew Fastow to be vicariously educational. From one of the smartest guys in the room:

https://www.irishtimes.com/business/companies/former-enron-cfo-andrew-fastow-you-can-follow-all-the-rules-and-still-commit-fraud-1.2485821

[SharperDingaan]

Ultimately it is cost versus benefit. 'Contain' the gaming to < 5% of the total population, and don't advertise.

When someone 'doesn't play nice', make an example that no one can 'mis-understand'. Mafiosi 'protect' the Vatican for a reason.

It is a very old time-worn approach, and has proven effective across the globe, and in multiple cultures. 

 

SD

 

[Hielko]

The court decision is outrageous as her swaps were done before the rules banning it were active. In non-banana jurisdictions there's a little thing called legal certainty.

Legal certainty is not a thing that can exist, because there are always ambiguities in the interpretation of rules and facts.

 

Besides that, it sounds to me that she was not only quite obviously breaking the "spirit" of the law as it was written at the time, but also the actual letter of the law. That's why she lost in court, not because the rules were changed at a later point. They changed the law to make it crystal clear that this was not allowed, but that wasn't actually needed. She thought she was smart by exploiting a loophole in the pricing mechanism her broker used for off-market swaps, but just because a broker makes something possible, it doesn't make it legal.

[StubbleJumper]

The court decision is outrageous as her swaps were done before the rules banning it were active. In non-banana jurisdictions there's a little thing called legal certainty.

 

Then again the UK once post facto changed the statute of limitations and prostecuted people for (old) crimes on the basis of that.

 

 

Yes, except that the rules against doing that type of thing have been in existence since 1988.  It's called the General Anti-Avoidance rule.  If you undertake a series of transactions in Canada for the sole purpose of triggering income tax benefits, you risk running afoul with Anti-avoidance.  You can go to Federal Tax Court, and you might win...but you might not.

 

 

SJ