Trading Taxes in Canada
Taxes for trading in Canada are determined by several factors. This guide will unpack trading tax rules, laws and implications. It will break down the tax categories you could fall into, asset specific taxes, plus tips for managing your obligations.
Key Takeaways
- The Canada Revenue Agency (CRA) oversees and administers tax laws within most of the provincial and territorial governments in Canada.
- Canadian traders can fall under two brackets for tax purposes: capital gains and business income. The latter is more applicable to day traders.
- The CRA will consider individual circumstances to determine your tax bracket, including the frequency of trades and motivation for online trading.
- Some costs can be claimed as business expenses if all relevant receipts are declared on a tax return. Trading losses can also be deducted against other sources of income.
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What Is Your Legal Tax Responsibility?
Day trading tax rules in Canada are relatively fair. Once you have identified which of the brackets detailed below your trading activity falls into, you are required to pay taxes on your generated income by the end of the tax year – December 31st.
However, late and non-payments can result in serious consequences, with punishments ranging from fines to jail time.
Breaking Down Taxes
Taxes on trading in Canada can be split into two distinct brackets. The first falls under the capital gains tax regime. The second and most applicable to day traders is in regard to business income.
Capital Gains
Investors trading in the markets outside of their RRSP or RRIF, will probably treat profits from investing activities as capital gains. This comes with an advantage – capital gains are taxed at just 50% of your marginal tax rate.
If intraday profits do qualify as capital gains, traders will need to look to schedule 3. This totals all the income sources eligible for capital gains and losses. It then takes half this amount for entry on line 127 of the federal tax return.
However, any losses incurred can only be offset against other capital gains. This also means that trading fees are not tax deductible under these rules.
It is worth noting that the capital gains regime is geared towards longer-term and infrequent investors.
Drawbacks To Capital Gains
Despite the advantageous tax rate, there are important Canadian rules around taxes to be aware of.
One of which is known as the ‘superficial loss rule’, or the ’30-day rule’. This stipulates that if an investor, a spouse, or a company they control buys back an asset or similar asset within 30-days of selling it, they cannot claim the capital loss for tax purposes. This rule trips up traders each year.
Business Income
Day traders typically look to close out any positions by the end of the trading day and are concerned with making profits on small price movements across a high number of trades.
Because the primary motivation is to generate profit, traders must report earnings as business income. This income is then fully taxable at the marginal rate.
Benefits
- Deducting Losses – Unfortunately, day traders cannot utilize the 50% capital gains inclusion rate on profits. However, they can deduct 100% of trading losses against other sources of income. For example, a day trader generates $25,000 in trading losses this tax year. However, they also have a graphic design business. They can offset their trading losses against the revenue generated from their graphic design business, therefore significantly reducing their total tax liability.
- Claiming Expenses – Traders can also claim expenses related to trading activities, as long as all receipts are declared on the tax return. The Canada Revenue Agency (CRA) will not accept these deductions without receipts, and justification must be provided on how each purchase was related to trading activities. This can include anything from educational resources to the purchase of a computer and a monthly internet bill.
Classification Requirements
Unfortunately, traders do not get much of a choice in determining which system will be the most beneficial to them.
In a 1984 revised bulletin entitled ‘Transactions in Securities’, the CRA outlined the factors they will consider in deciding whether your trading activity constitutes ‘business income’.
It highlighted the following:
- Frequency – Are you making a high number of short-term trades? Is your trading pattern similar to ‘ordinary’ day traders? If so, you will likely face business income taxes.
- Investor knowledge – Do you have an in-depth knowledge and skill set that would suggest targeted trading instead of speculative gambling?
- Investment – This is not just about financial investment. Do you spend a substantial amount of time studying the markets and investigating potential moves?
- Liquid assets – Are you buying and selling popular day trading assets in high volumes? The Canadian Investment Regulatory Organization (CIRO) defines certain popular day trading securities as those trading in excess of one hundred times a day, with a trading value of $1 million.
- Ordinary business – Is your trading activity part of your normal business? Alternatively, is it something you do infrequently on the side?
- Motivation – If you are a trader to earn significant profits, or to supplement your income, you will probably fall under the ‘business income’ criteria.
Although the CRA analyze each case individually, if you make a high number of trades and you own the asset for a relatively short period of time, any profits are likely to fall under the ‘business income’ taxes remit.
Asset Specific Rules
With the rise in cryptocurrency and the complex nature of some instruments, many traders rightly question whether you face different tax obligations in certain products, such as futures and options.
Overall, the CRA is concerned more with how and why you are trading, than what it is you are buying and selling. Therefore, futures tax reporting will often face the same procedure and implications as a tax return on ETFs.
Having said that, the rules and regulations in some markets require clarification.
Binary Options
Binary options trading tax treatment in Canada is complex. The main thing to note is all gains from options must be reported within the tax year the options expired. For day traders, this should be relatively straightforward.
To make options trading tax reporting stress-free, it is important to keep a spreadsheet detailing all trades. Whether they finish ‘in the money’ or ‘out the money’ is largely irrelevant.
The benefit of a spreadsheet is that it can automatically calculate your total profit and loss.
As the binary options industry is yet to be regulated properly in Canada, keeping a close record of previous activity is essential. This lack of regulation can make getting information via formal channels a complex procedure.
It is also worth keeping abreast of developments in binary options.
Forex
Canadian tax laws on currency trading are another topic of interest. With some assets, it is fairly clear whether they will be treated as income or capital gains. However, the 2010 CRA Income Tax Interpretation Bulletin suggests that forex trading taxes in Canada can be either.
The bulletin laid out an important point to bear in mind when filing a tax return on forex income in Canada:
“Where it can be determined that a gain or loss on foreign exchange arose as a direct consequence of the purchase or sale of goods abroad, or the rendering of services abroad, and such goods or services are used in the business operations of the taxpayer, such gain or loss is brought into income account. If, on the other hand, it can be determined that a gain or loss on foreign exchange arose as a direct consequence of the purchase or sale of capital assets, this gain or loss is either a capital gain or capital loss, as the case may be.”
It was also pointed out that the nature of the foreign exchange gain or loss is not affected by the length of time between the date the property is acquired (or disposed of) and the date upon which payment (or receipt) is affected.
So, the forex day trading tax implications in Canada are to a certain extent controllable by the trader.
However, the CRA has pointed out that forex tax reporting must be consistent. Thus, any profits initially filed as business income cannot later be changed to capital gains simply to reap tax benefits.
Tips For Preparing Taxes
Keep A Record
Traders are solely responsible for declaring taxes on earnings. Brokers may hand over records, but they are not legally obliged to. As such, it is key to keep a detailed record of all trading activity to avoid any hassle at the end of the tax year.
You should keep details of the following:
- Instrument
- Purchase & sale date
- Price
- Size
- Entry & exit points
Day Trading Tax Software
Today there exists intelligent trading tax software that can store all the required information and data on trades. Some software can even be linked directly to your brokerage. Alternatively, CMC Markets offers an integrated tax reporting solution.
This can make filling taxes a relatively straightforward process.
Final Points
Day trading tax implications in Canada can be complex but keeping a trading record and utilizing tax software can help ensure the process of filing returns is relatively stress-free.
Having said that, it is important you are aware of some of the Canadian tax regulations outlined above, plus any asset specific rules applicable to your trading activity. Canada Banks, a conglomeration of financial institutions based in Canada, has already pointed out that the government’s tax officers scrutinize active day traders carefully.
This page is not trying to give you tax advice. Instead, it hopes to bring some clarity to the system that governs Canadian trading taxes. If you do have any questions or issues, you can contact the CRA, or seek professional tax advice from an accountant.
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