I am just getting started as a day trader. My accountant tells me that, as a person who holds stock for short periods, my earnings will be considered to be income instead of capital gains. That means having to pay tax on 100% of the earnings (after commissions etc.) instead of 50%. Is it possible to day trade in Canada and still have earnings considered to be capital gains? If so how? Thanks for your help.
As a public practice accountant I would tell you this if you had another income (job) and did daytrading on the side - the income from daytrading would most likely be considered capital gain for both long and short term holds. 50% inclusion or 20% tax on the total If you derive a substantial amount of income from trading or do not have another Job - It will be considered regular income. ie. it is your job
Revenue Canada link: http://www.ccra-adrc.gc.ca/E/pub/tp/it479ret/it479re.txt.html Basically you elect to be treated as a biz if you want to deduct expenses. Bottom line though is always talk to accountant for last word on the subject. DISPOSITION OF SECURITIES - INCOME OR CAPITAL 9. Some security transactions are clearly on income account and these types of transactions are discussed in 15 to 21 below. For other security transactions it will be necessary to examine the facts of the specific case in order to determine whether a transaction is on income or capital account. The tests that the Courts have applied in making such a determination are those of "course of conduct" and "intention" and these tests are discussed in 10 to 13 below. The factors to be considered when determining whether the gain or loss on the disposition of a bond, debenture, bill, note, mortgage, hypothec or similar obligation (debt obligation) is on income account or capital account are set out in IT-114, "Discounts, Premiums and Bonuses on Debt Obligations". 10. Where the whole course of conduct indicates that (a) in security transactions the taxpayer is disposing of securities in a way capable of producing gains and with that object in view, and (b) the transactions are of the same kind and carried on in the same way as those of a trader or dealer in securities. the proceeds of sale will normally be considered to be income from a business and, therefore, on income account. 11. Some of the factors to be considered in ascertaining whether the taxpayer's course of conduct indicates the carrying on of a business are as follows: (a) frequency of transactions - a history of extensive buying and selling of securities or of a quick turnover of properties, (b) period of ownership - securities are usually owned only for a short period of time, (c) knowledge of securities markets - the taxpayer has some knowledge of or experience in the securities markets, (d) security transactions form a part of a taxpayer's ordinary business, (e) time spent - a substantial part of the taxpayer's time is spent studying the securities markets and investigating potential purchases, (f) financing - security purchases are financed primarily on margin or by some other form of debt, (g) advertising - the taxpayer has advertised or otherwise made it known that he is willing to purchase securities, and PAGE 4 (h) in the case of shares, their nature - normally speculative in nature or of a non-dividend type.
this is a fuzzy part of the law. I wouldn´t be surprised if someone actually stood up to the government and said ¨Prove it!¨ Basically what I mean by that is how much trading exactly would constitute a ´job´ and how little would just be dabbling on the side? Lets say you play the markets one a month, is that a job? how about 3 times a week? see where I´m going with this? As the above post states, it has to be substantial, but what does that mean? only a judge can put it into quantitative terms. Also, capital gains are capital gains. If you earn a profit by trading shares on an exchange, those profits are considered capital gains. I would love to see the government try and prove that they are ´income´.
I have the same concerns myself about having to pay full income tax on any short term profits. I was going to use the American portion of my RRSP to daytrade with and thus avoid any taxes. I don't think you're allowed to short stocks in your RRSP though.
Nor can you daytrade it through a US broker that has the trading platform apporpriate to the task. To attempt to daytrade through a conventional Canadian discount broker is a recipe for disaster.