Canadian taxes - Capital gains versus income for Frequent buys

Discussion in 'Taxes and Accounting' started by mshefford, Jan 24, 2007.

  1. mshefford


    Assuming an investor has a significant portfolio (excess of $250K), and buys and sells securities from time to time (average holding period is usually over a year) and has a relatively low yearly turnover (under 25%), does it matter, for income tax purposes (in terms of whether he would be eligible for 50% taxable capital gains treatment , or whether he may be flagged for 100% taxable business income treatment on gains), how he or she allocates the portfolio into a number of assets, and how often he buys additional securities.

    In other words, does the ability to claim capital gains treatment (50% taxable) change if one decides to split the overall portfolio into 10, 50, or 100 or more different securities. In my estimation, as long as each security was purchased with the intended purpose of deriving long-term benefits (ie. dividends, etc..), it should be eligible as a capital property - regardless of whether the investor holds 5 or 100 different securities.

    Furthermore, if the investor is still earning non-trading related employment income, I think he or she should be able to
    continually use aftertax proceeds to add to the portfolio (ie. perform 5-10 buy transactions per month to keep adding to the portfolio) without being at risk for being called a trader or "in the business" of trading.

    For diversification purposes, I think it's best to hold at least 30,
    and preferably 50 or more different equities and equity funds (to
    minimize unsystemic risk).

    The more often an investor transacts in securities, the more likely CRA could force him to report profits as regular income. But there should be a difference between buying and selling. I don't think that someone who buys often (to diversify, to dollar cost average) but doesn't sell nearly as often, should be classified as a trader (who buys and sells often and has short holding periods). Any comments or thoughts on this?
  2. Everything you describe would be capital gains pretty clearly. I've attached an information circular from CRA that spells it out. Short selling will be considered income, as will futures transactions. Options are a bit more subjective.