Can You Buy Penny Stocks in a TFSA? (It’s Complicated)


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New investors often wonder whether or not buying penny stocks in a TFSA is allowed or not.

So if this something you are wondering, just know you are not alone. 

While you are technically allowed to buy penny stocks within your TFSA, it’s not something that is recommended unless you plan on holding that stock for a relatively long period of time. Trading penny stocks within your TFSA could result in your account being flagged and audited by the CRA.

You see, the TFSA was designed for Canadians to buy and hold stocks for the long term, so if your plan is to day-trade your way to wealth through your TFSA, you need a new plan.

But here’s the thing, if you find a penny stock worth buying for the long term, go ahead and buy it! But the key word here is long term.

If the CRA detects that you are buying and selling penny stocks on a daily basis then like I said, your account runs the risk of getting red flagged.

Don’t only take my word for it though, below is a screenshot from a Yahoo Finance article that I will also link to here.

Buy hey, there are a lot of publicly traded companies out there that have stock prices that would be considered “penny stocks”. I’m not saying you can’t buy penny stocks within your TFSA, I’m saying you can’t day trade or even swing trade penny stocks within your TFSA.

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So again, you are allowed to invest in penny stocks within your TFSA, but you can’t day trade them. 

If your investment strategy is finding cheap penny stocks from companies that you think have strong fundamentals and a good chance of growth, then go for it – you should be fine.

Now you might be wondering, well what constitutes “day trading”.

This next section will actually talk about a few things that the CRA looks at when trying to determine if someone is in fact trading within their TFSA.

Remember, day trading in your TFSA is not allowed.

Is Day Trading Allowed in a TFSA?

Because day trading is considered a profession, it is not allowed to be done in a TFSA. Any income generated from day trading will be considered business income and will be taxed as such.

When the CRA audits someone’s TFSA records, they are trying to decide whether or not the investor is earning “business income” or “investment income”.

  • If your earnings are deemed to be investment income, then you are fine, take your TFSA income and enjoy the fruits of your investments!
  • If your earnings are considered “business income” then you will have to pay income tax on your earnings. 

6 Signs of Day-Trading within a TFSA

  1. Duration of Holdings – How long are you holding your investments for?
  1. Trading Volume – How often are you buying and selling securities? 
  1. Time Spent Trading –  Are you researching the markets for hours each day? Are you running a side business out of your TFSA? That is not allowed.
  1. Type of Investments – As stated above, you are allowed to buy penny stocks within your TFSA, but if there are other signs of day trading within your TFSA, they could look at what type of securities you are investing in.
  1. Experience in Securities Market – How much previous experience do you have in the securities industry? 
  1. Purchase Intent – Why are you buying certain securities? What is your purchase intent? To flip it for a quick profit or to buy and hold it?

Related Article by The Financial Geek: Day Trading in a TFSA| Is it Allowed?

At the end of the day, the CRA just doesn’t want people running businesses through their TFSA account, which you can’t really blame them for. These registered accounts are meant for investment income, not business income.

Should You Buy Penny Stocks in a TFSA?

Okay, so now you know that you are in fact  allowed to hold Penny stocks in your TFSA, but should you?

If you’ve read this blog before, you know I don’t give out specific investment advice on what you should and shouldn’t invest in, no one knows with 100% certainty which way a stock is going to go – if someone tells you they know for sure, run!

With that said, investing in penny stocks within my TFSA is not something I do. 

For one, if I ever play around with penny stocks, I’ll do it outside my TFSA in a regular, non registered brokerage account. 

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If you do it this way, you’ll never have to worry about things like over-contributing to your TFSA. 

Not only that, but remember some of the factors that the CRA looks at when determining whether or not someone is day-trading in a TFSA, and be honest with yourself. Why are you buying these stocks? Are you really in it for the long run?

If so, then who am I to judge? Go for it, but if you really don’t know anything about the penny stock you are about to buy, and you’re just buying it because it’s cheap and you want to try and flip it in the short term, then invest in the stock outside your TFSA.

All this to say, unless you plan on holding penny stocks for the long term, you should avoid investing in them within your TFSA, this way you avoid potentially getting your account flagged and you are less likely to over contribute to your TFSA.

Related Article: What Investments Can I Hold in My TFSA? 

Conclusion

If you’re a conclusion reader like myself, here are the coles notes of the article.  

You can invest in penny stocks within your TFSA, but unless you plan on holding your investments for a long period of time, it’s not recommended. Buying penny stocks is often associated with trading activities rather than long term investments, and because of this, you increase the likelihood of your account getting flagged by the CRA 

If you want my opinion, I would just avoid penny stocks within your TFSA all together. It’s just not worth risking it. Getting your account flagged and audited by the CRA will prove to be a major inconvenience you won’t want to deal with. 

So there you have it folks. Thanks for reading, and as always I hope you learned something from this article.

Geek, out.

Noel

Noel is the founder and main contributor for his blog - Noel's passion for personal finance has helped him amass over 600k readers to his Financial Geek blog.

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