I was wondering how some of you guys walk around this mess which are canadian taxes on equities? Do most of you guys just bypass it all and consider it as business income or did some of you guys just fought it and consider most of equitie trades as capital gains?
This one is tricky, I plan on sitting down with an accountant once I reach the point of trading more frequently, trading options and/or trading futures. If you trade infrequently as a part-time thing, you will probably have no problem reporting your trading as capital gains for equities (that's how I currently handle my own reporting). Infrequent long options trading is apparently subject to the same treatment, though i'm not sure which line number they get reported on. Some general guidelines regarding trading being business income appears to be the following types of stuff: - If you spend a very significant amount of time trading (i.e. kind of like trading as a full-time occupation) - If you short-sell equities - If you trade on margin I am not a tax professional, so please don't rely on any of the above as some form of professional advice. I also agree that our tax system is a bit obscure when it comes to trading, but like I said, I plan on further investigating this once I reach the point in time where I am doing higher volume trading. P.S. An easy way around much of this is to trade equities in a self-directed RRSP account, since you are then free of having to bother tracking/reporting all this stuff. For example, I would be hesitant to buy and hold units of an income trust outside of a tax-sheltered account, because income reporting would likely be a big pain in the ass. Of course the disadvantage of doing so is that you are then highly restricted in the types of trading you can do.
CCRA has a publication available which describes the tax treatment of what they consider to be 'professionals' (i don't recall the name). As mentioned by Chagi, they have certain criteria that need to be met. As far as I remember, you can make a one time election to have all of your capital gains (trading profits) considered to be capital gains going forward as opposed to income. I wouldn't worry about it too much right now. At some point when the tax revenues they are losing on you becomes an issue, i'm sure they'll come calling. If trading isn't your sole source of income, I wouldn't worry too much.
I don't think it's a mess at all. The Canadian system is actually pretty simple and a lot more straightforward than the US system. If you trade full time you are running a business and you claim what you make as income and any expense you incur to earn that income is deductable. If you don't do it full time, try to claim as much as you can as capital gains. Just be aware of what kinds of transactions are disallowed as such and must be treated as income. There was an interpretation bulletin several years ago that spelled it out pretty well. You can search for it on the CRA site.
One question I'm curious about - does this type of trading as a business just get reported as a sole proprietorship? I assume that you can just run your retail account under your own name, rather than incorporating?
Yes. File a personal tax return and include a T2124, Statement of Business Activities. Deduct interest costs, subscriptions, hardware, home office expenses, etc
I know its really tricky. thats why I try to keep seperate accounts. I was told that short sales were considered the same as trading long in canada, along with with options trading. And futures trading isnt a problem since most are considered capital gains. It just depended on the frequency. But then it become even more trickier b/c of rules allowing people to sell at opportune times. I dont understand in canada when they determine you are running a business or its capital gains. For example you made over 1000 trades*1 buy and sell* in quarter or if its just by luck the cra picks you out and say these arent capital gains, they are business income. I talked to my cga and she said it depends on the circumstances. I wish we had a system where it was just simple if you made over such and such trades in a quarter you are business if not cap gains. Or something like trader status in the US
http://www.cra-arc.gc.ca/E/pub/tp/it479r/it479r-e.html http://www.cra-arc.gc.ca/E/pub/tp/it479rsr/it479rsr-e.html Here's the interpretation bulletin from the gov't.
That really sucks, it sounds though like they are mostly interested in reporting consistency for the retail trader. But a few of those comments about "frequency", "period of ownership", and "time spent" are a bit of a concern. That would be so crappy to have to report gains as income. IMO, that is one of the big advantages of trading, only 50% of capital gains are taxed.... I have been wondering about this for a while now.