Albert Einstein famously stated, “The hardest thing in the world to understand is income taxes.â€ Day trading taxes in Canada certainly support that statement, and you canâ€™t join the likes of top Vancouver trader Jeff Pierce without first tackling the tax demon. This page will detail trading tax rules, laws and implications. It will break down the tax categories you could fall into. It will discuss asset specific taxes, before concluding with top tax tips for the savvy day trader.
What Is Your Legal Tax Responsibility?
Day trading tax rules in Canada are on the whole 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. Best case scenario – you have to repay the money. However, if thatâ€™s a large amount then you may find yourself unable to effectively day trade anymore, limiting your ability to generate profit.
Worst case scenario – You are pursued in the criminal courts and face up to five years in jail, as stated in the Income Tax Act or the Excise Tax Act.Â So, despite taxes on day trading in Canada not always being straightforward, the ramifications of not meeting your obligations are not worth the risk.
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.
If you’re trading in the markets outside of your RRSP or RRIF, youâ€™ll probably treat profits from your investing activities as capital gains. This comes with a distinct advantage – capital gains are taxed at just 50% of your marginal tax rate.
If your intraday profits do qualify as capital gains you 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 your federal tax return. However, any losses you incur can only be offset against other capital gains. Any other sources of income are off the cards. This also means that trading fees are not tax deductible under these rules.
Itâ€™s worth keeping in mind though, 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 â€˜superficial loss ruleâ€™, or the â€™30-day ruleâ€™. 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 many traders each year, costing a considerable amount in taxes.
For further clarification and other Canadian rules on taxes to be aware of, see our rules page.
As a day trader, you look to close out any positions by the end of the trading day. You are concerned with making profits on small price movements across a high number of trades. Because your primary motivation is to generate profit, you must report your earnings as business income. This income is then fully taxable at your marginal rate.
Deducting Losses –Â Unfortunately, as a day trader, you cannot utilise the 50% capital gains inclusion rate on your profits. However, you can deduct 100% of your trading losses against other sources of income. So, letâ€™s say you rack up $25,000 in trading losses this tax year. However, you also have a graphic design business. You can offset your trading losses against the revenue generated from your graphic design business. Hence, significantly reducing your total tax liability.
Claiming Expenses – You can also claim expenses related to your trading activities. In order to claim any day trader tax deductions in Canada though, you must have receipts for all the items declared on your return. The Canada Revenue Agency (CRA) will not accept these deductions without receipts, and you must also be able to justify how each purchase was related to trading activities. Once you have supporting evidence, you can include anything from educational resources to the purchase of a computer and your monthly internet bill.
Youâ€™re probably already trying to do the math to calculate which system of taxes will be most beneficial to your situation. However, let me stop you there. You do not get much of a choice in the matter.
In a 1984 revised bulletin entitled â€˜Transactions in Securitiesâ€™, the CRA outlined the factors they will consider in deciding whether your trading activity constitutes â€˜business incomeâ€™.
It highlighted the following:
- Frequency – Are you making a high number of short-term trades? Is your trading pattern similar to â€˜ordinaryâ€™ 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 Investment Industry Regulatory Organisation of Canada 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 â€˜business incomeâ€™ criteria.
Although the CRA analyse 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 â€˜business incomeâ€™ taxes remit.
Unfortunately, that means your dreams of the advantageous 50% capital gains rate may already be over.
Asset Specific Rules
With the rise in cryptocurrency markets and the complex nature of some instruments, many traders rightly question whether you face different tax obligations in certain markets. Will currency and stock trading taxes in Canada be the same as futures and options trading taxes, for example?
On the whole, 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 face the same procedure and implications as a tax return on ETFs.
Having said, the rules and regulations in some markets require clarification.
Binary options trading tax treatment in Canada takes you into murky waters. The main thing to note is all gains from your options must be reported within the tax year the options expired. If youâ€™re day trading this should be relatively straightforward.
To make options trading tax reporting stress-free when December rolls around, you need a detailed spreadsheet with all your trades in. Whether they finish â€˜in the moneyâ€™ or â€˜out the moneyâ€™ is irrelevant.
The benefit of a spreadsheet is that it can automatically calculate your total profit and loss. You can then swiftly refer to your spreadsheet to find the amounts to include on your returns.
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.
Itâ€™s also worth keeping abreast of developments in the binary options industry. If changes to taxes are introduced it could mean greater profits are left in your pocket at the end of the trading day.
Canadian tax laws on currency trading are another topic of interest. With some assets, itâ€™s pretty clear-cut as to whether they will be treated as income or capital gains. However, the 2010 CRAÂ Income Tax Interpretation Bulletin makes it clear 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:
â€œÂ 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.â€
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 effected.
So, the forex day trading tax implications in Canada are to a certain extent controllable by you. You and/or your account can decide which system will work best for your situation.
However, the CRA has pointed out that forex tax reporting must be consistent. So, if you file your profits as business income at the beginning, you cannot later change it to capital gains simply to reap tax benefits.
Tips For Preparing Taxes
Keep A Record
Most people dread the time-consuming hours where you compile all your paperwork to set about filing your tax return. Even getting it all together to give to an accountant is a painstaking process.
Unfortunately, you are solely responsible for declaring taxes on your earnings. Your broker may hand over records, but they are not legally obliged to. That means if you want to make filing your tax returns a hassle-free process, you need to keep a detailed record of all your trading activity.
You should keep details of the following:
- Purchase & sale date
- Entry & exit points
With this information to hand youâ€™ll find submitting your day trader taxes in Canada a walk in the park.
Day Trading Tax Software
Identifying and proving your trader tax status is far easier if you have technology on your side. Today there exists intelligent trading tax software that can store all the required information and data on your trades. Some software can even be linked directly to your brokerage.
This can make filling your taxes a straightforward process. It will also leave you more time for analysing the markets and generating profits.
Day trading tax implications in Canada should not deter you from stepping into the trading arena. If you keep a careful record and utilise tax software, filing your returns should be relatively stress-free.
Having said that, itâ€™s 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 the governmentâ€™s tax officers scrutinise active day traders carefully. So, give your taxes the same attention and detail as you do your trading.
This page is not trying to give you tax advice. Instead, it hopes to bring clarity to the sometimes confusing system that governs Canadian 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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