Calculating Capital Gains When Day Trading in Canada
You realize a capital gain when you buy security and sell at a profit.
In order to determine the taxable capital gain, the capital gain amount is multiplied with the year’s inclusion rate. At the moment this rate is 50%
Capital gains tax may not be applicable for day traders as they make a living purchasing and selling stocks.
What is Day Trading?
In simple terms, day trading can be defined as the practice of turning over securities as quickly within a day into profits on small fluctuations in price.
A day trader can be defined as a person who earns a living by buying, selling, and managing transactions of such a nature.
A day trader can also be someone who works in the investment industry and frequently earns profits from short term investments.
There are several factors which The Canada Revenue Agency put into consideration in defining investment professionals for taxation purposes.
For example, if a taxpayer uses day trading to earn and significantly augment his or her income, he is ineligible to claim capital gains and the tax rate attached to such earnings.
How Investment Businesses Is Defined
There are numerous factors considered by The CRA to determine if a taxpayer is in the business of buying and selling securities.
One of the essential attributes of a professional investor is that he/she is involved in many buying and selling transaction and holds ownership of securities for a short duration.
1. One identifier used by the CRA is the taxpayer’s knowledge and experience in securities markets and transactions.
The time spent in market analysis and investments is also used to identify persons who are engaged in Investment as a business. Since the purchases are usually financed on margin or debt, dividends will not be paid on shares purchased.
2. For each security transaction made a T5008 form is generated, this helps identify the purchases via name and social insurance number. With such information, the CRA is easily able to match purchases with tax returns.
3. Investors report income and capital gains through their federal tax return and Schedule 3, respectively. The size of capital gains claimed can also be used to determine if a taxpayer invests as a business.
How Investment Business Is seen for Non-Professional Investors
Generally, the average Canadian investor usually does not turn over securities swiftly. In light of the rising popularity of registered retirement savings plans and tax-free savings accounts, the capital gains option is now a less used option.
In RRSPs and TFSAs, money grows tax-free, and as a result, when taxation occurs, it is in the form of income at the time of withdrawal from RRSPs. Or no income tax at all if it’s about TFSA.
TFSAs are purchased with after-tax dollars, and with zero taxation upon withdrawal.
For taxpayers who employ day-trading techniques for investments there are no restrictions as profits gained are declarable and are taxed as capital gains.
In order for the profit to be considered Capital Gain, the investor as such would have another source of income, most likely anything other than the investment industry as his portfolio will have a low proportion of highly liquid stocks and his portfolio will probably be low.
However, if an investor dedicates himself full-time to trading activities, his only source of income being the investment income, the risk for this type of investor is that CRA would consider him being a professional in the sector, therefore, all his income will be considered business income and not capital gains.
Claiming Capital Gains
The day-trading profits are reported annually in your income tax return.
“When declaring capital gains from any disposition of capital properties, you report these earnings using Schedule 3, which also covers other type or sources of income that may not be applicable to you for a specific tax year,” says Brent Allen, regional director, certified financial planner and financial management adviser with Investors Group in London, Ontario.
In Schedule 3, income from all eligible sources are totaled for capital gains and losses, and half of this amount is taken for entry on line 127 of your federal tax return.
This article only provides information in a general nature and is only as current as the date in which it is posted. It is not updated and therefore may no longer be current. This document should not be relied upon as it does not claim to, nor provide advice on legal or tax matters. All tax situations are specific in nature and will likely differ from the situations that are presented in the article. It is advisable that you seek and consult a tax professional if you have any specific legal or tax questions. This document is intended to provide general information on a particular subject or subjects(s) and this article is not an exhaustive treatment of such subject(s). In accordance, the information in this document is not intended to constitute or replace accounting, tax, legal, investment, consulting, or other professional advice or services. Before any decision is made, or any action taken which might affect your personal finances or business, you should consult a qualified, professional adviser.