A growing number of taxpayers are trading on the stock market using online broker accounts. Knowing how to report gains/losses from trading activity accurately on your tax return is especially important since failing to do so can end up being a costly mistake and leave you owing lots of money to CRA.
The most important question you should ask yourself is, are you trading on account of business income vs. capital gains.
What is the difference between business income vs. capital gains and what are the factors to consider?
The reason we care so much about whether your trading activity is on account of business income or capital gains, is because business income gets taxed at 100% whereas capital gains are only taxed at 50%. Also, capital gain losses are only deductible against other capital gains, and business losses can be deducted against other sources of income, even employment income. This has a major impact on the taxes you pay at the end of the day.
Factors to consider:
Frequency of transactions
Period of ownership
How much of your time you spend studying and investigating the securities market
The securities you purchase are speculative in nature
Security purchases are financed primarily on margin or by debt
Intention
For those who have a high frequency of transactions, short period of ownership, spend substantial time researching the markets, make speculative trades, and who finance trading on margin or by debt, would be considered day traders and would include 100% of your gains as income. If you did incur losses, it would be advantageous for you to claim those losses against other sources of income.
Most importantly, the intention of the taxpayer is examined to determine whether to treat transactions as income or capital. It is possible that a taxpayer may have investments which are capital transactions and others that are income transactions. You could do that by having two separate investment accounts. One for day trading and one for long term investing.
Do you invest using your TFSA?
Many taxpayers take advantage of the Tax-Free Savings Account to avoid paying any capital gains or tax on interest and dividend income. However, the TFSA is only a tax haven to those who are investing and not day trading on account of business income. Therefore, if you have dozens and dozens of trades during the year and are in fact day trading, CRA could determine that you will owe tax on 100% of your profits, since tax-free capital gains is only available to those who trade to earn investment income.
What if you already filed your taxes and made an error reporting your transactions?
If you made an error reporting your day trading activity as capital gains/losses, you are still able to amend your return to report your taxes accurately. If you had significant losses from your trading, this will be advantageous for you since you can take those non-capital losses and apply it against other sources of income or carry-back those losses for up to 3 previous tax years to recover any tax paid.
Contact Argento CPA if you have any questions about whether you are earning investment income or business income.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.