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.
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.
Key Takeaways
- The Canada Revenue Agency (CRA) administers tax laws and related programs for the Government of Canada and for most provinces and territories.
- Canadian traders can fall under two classifications for tax purposes: capital gains and business income. The latter is more applicable to day traders.
- The CRA will consider how often you trade, how long you hold positions and how organized your activity is.
- If the CRA treats your trading as a business, some costs can be claimed as business expenses (with appropriate documentation), and genuine business trading losses may generally be deducted against other sources of income.
Best Brokers In Canada
These 4 brokers offer the best trading conditions for Canadian traders:
What Is Your Legal Tax Responsibility?
Day trading tax rules in Canada are relatively fair. Once you understand how your trading activity is likely to be classified for tax purposes (business income or capital gains), you must report your trading income or losses for the calendar year ending December 31 on your tax return, with any balance of tax generally due by April 30 of the following year (later filing deadlines may apply if you are self-employed).
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 – currently, only 50% of a capital gain is included in your taxable income and taxed at your marginal rate (the ‘50% inclusion 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 and then flows the taxable portion to line 12700 (Taxable capital gains) on your federal tax return.
However, net capital losses generally can only be applied against capital gains (with limited carry-forward and carry-back rules). Trading costs such as commissions and brokers’ fees are not deducted as separate expenses; instead, they are included in the capital gain/loss calculation by adding them to the adjusted cost base or subtracting them from the proceeds of disposition.
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 rule generally denies a capital loss if you, your spouse or common-law partner, or a corporation or trust you control buys (or has the right to buy) the same property during the period that begins 30 days before and ends 30 days after the sale, and the substituted property is still held 30 days after the sale. 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.
If the CRA concludes that you are carrying out a trading business rather than investing (based on factors such as the frequency and volume of your trades, the period you hold positions, your market knowledge, and your time commitment), then your profits are taxed as business income and are fully included in income at your marginal tax rate.
Benefits
- Deducting Losses – If your trading is classified by the CRA as a business, you do not get the 50% capital gains inclusion rate on profits, but genuine business trading losses can generally be deducted against other sources of income (subject to the normal rules for business and non-capital losses).
- 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) treats certain ‘highly liquid’ day-trading securities as those that have traded, on average, at least 100 times per trading day with an average trading value of at least $1 million over a recent 60-day period.
- 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 analyzes 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’ tax 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
For most individual investors in Canada, trading offshore ‘binary options’ platforms is effectively off-limits.
Canadian securities regulators have adopted rules that prohibit binary options contracts to individuals, and they have stated that there are no registered firms or individuals permitted to trade binary options products with retail clients in Canada. Any platform offering such products to Canadians is very likely unregistered and may be operating illegally.
In general, any gains or losses from legal option transactions must still be reported in the year the contract is disposed of, exercised, or expires, but anyone considering complex derivatives should get individual tax and legal advice first.
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, CRA’s Interpretation Bulletin IT-95R on foreign exchange gains and losses (now archived but still used for reference) confirms that foreign-exchange gains and losses can be treated as income or capital depending on the underlying transaction or asset.
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, within the limits of the tax rules and consistent reporting, the forex tax treatment can sometimes be influenced by how your trading is structured, but the CRA can reassess if it disagrees with your classification.”
The CRA has also 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 and financial institutions generally must report securities dispositions to the CRA and usually provide clients with statements, but you should still maintain your own detailed records rather than relying only on these.
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 filing 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, you must be aware of some of the Canadian tax regulations outlined above, plus any asset-specific rules applicable to your trading activity. Tax practitioners and Canadian financial institutions have noted that the CRA often scrutinizes very active day-trading activity, particularly when trading volume is high relative to other income or when large gains are generated in registered plans.
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