Filing Day Trading Taxes in Canada 101
Since I'm a proud Canadian trader, I've gotten tons of requests to go over exactly how we do taxes for day trading income so we do not, god forbid, anger the CRA, Canada Revenue Agency. Trust me, you do not want the CRA going after your a$$es.
Mandatory Disclaimer:
I am not a CPA, nor a financial advisor. I’m not licensed. I don't know anything about taxes. Everyone's tax situation will be vastly different. It’s your own responsibility to ensure all your taxes are filed correctly and legally by a professional. I have no idea what I'm talking about. I'm bad at math, and I didn't even get straight A’s in high school.
Okay I lied. I totally did get straight A’s, but just A’s not A pluses, and if your cultural background is Asian, like me, A stands for average.
I have never actually prepared and filed any taxes myself. I’ve always consulted my CPA to prepare my tax filing, but for the purpose of this article, I simply booked a business tax consultation with my CPA to discuss the details regarding day trading and trading taxes in general in Canada.
Therefore, this article is simply a summary of what I learned after the appointment and not financial or tax advice. You should always make sure to talk to a tax professional when filing taxes, especially with something as complicated as day trading taxes, whether it be capital gains or business income.
Is trading income considered capital gains income or business income?
This is perhaps the biggest question many Canadian traders have.
Because business income is just like employment income, it's 100% taxable. This means if you made $10,000 from trading that's filed as business income and you’re in the tax bracket of 20%, then you have to pay $2,000 in taxes. Your take home income is only $8,000.
On the other hand, if you were filing capital gains income on that same $10K, then only 50% of those gains are taxable meaning you’d pay a 20% tax rate on only $5,000. That equates to paying the CRA only $1,000, and you get to keep the remaining $9,000.
To answer that important question posed in the section title, you need to find out whether you qualify as a day trader or an investor. Unfortunately, you can’t just randomly decide that yourself and just report 50% your trading income just because you say so. Life doesn’t work like that. It has to be under the almighty CRA’s rules.
CRA Definitions
How you define such is mostly but not limited to these 4 factors: how often you trade, how long you hold the securities, the amount of time you spend on trading and market related research and how substantial your trading income is.
1. How often you trade
When we are day trading, we are buying a position and selling it really quickly within the same day. That's why it’s called day trading, not weekly or monthly trading. As day traders, we are profiting from small price fluctuations and often multiple transactions within a single day.
As a day trader, I do participate in the market every single day the markets open, and most days I make more than 10 trades a day. There are days where I make 30, 50 or even more, only because day trading is my business.
2. How long you hold the securities
If I was an investor claiming capital gains income, I most likely would just make one or two transactions per month. Maybe I was buying some stocks months ago when the stock crashed to below a certain amount, and perhaps I would be selling it right now when the stock had just reported an earnings beat, trading at all time highs.
An investor isn’t making buy and sell transactions daily, but rather is holding a security for at least more than a day, usually a much longer period of time such as weeks, months or years. The security is meant as an investment for the potential long term growth of a company, NOT as merely a vehicle for him to take advantage of the short timer price fluctuations
3. How much time you spend trading
A day trader, by definition, is most likely spending the majority of his time sitting in front of the computer, staring at each tick on the candle. They are alone at home in front of a table full of smokes and beer cans, while drowning in hilarious comments on social media and rejections on dating apps.
Oh wait, that's just me.
Generally speaking, a day trader would spend a vast majority of their working hours studying the market, like I do. I've mentioned in my videos that I spend 2 hours before the market opens to prepare my daily trading plan. Then, I actively trade and monitor all the movers for the next 7 hours. I’ll put in an extra 2 or 3 hours in the evenings after the market closes, too.
The amount of time a day trader generally spends on the stock market is equal to a standard 9 to 5 job because they are in the business of making money from daily volatility.
If you were an investor claiming capital gains, you probably would spend the majority of your daily hours on your main employment job or other business. They only have a few hours monthly or just on weekends to read up on the market and look for potential buying and selling opportunities for their long investment.
4. How substantial your trading income is
Now, compared to the other three I mentioned before, this one is in a little bit of a gray area because how the word “substantial” is defined will almost always be different for every individual.
If you’re working a full time job as an engineer making $120K a year and you make $10K from day trading two days a week for an hour before going to work, that trading income of 10K may not seem as substantial in comparison to your employment income of $120K.
However, if you were a stay at home parent or a student with no full time job and no other sources of income and you day trade, making $10k, that trading income would be more likely to be substantial under CRA definitions.
That's why our situations would all be very different. It's important to talk to a tax professional and see whether your personal trading income should be filed as capital gains at only a 50% taxable rate or as business income at a 100% taxable rate of your marginal tax rate.
You may have realized by now, but yes, I am an active day trader. Yes, 100% of my trading profit is considered business income, and therefore, it is 100% taxable at my marginal tax rate. I have a feeling if you’re reading this article, you probably fall under the business income too. Just saying.
Capital Gains and Business Income
Filing trading income as a business isn’t that bad, besides paying more tax than we had hoped. There are a lot of advantages and disadvantages to filing either as business income or capital gains.
Capital Gains
Let’s talk about capital gains first. If you were a long term investor or a casual swing trader who met the four factors we talked about earlier and you’re filing your trading income as capital gains, the pros of doing so would be that only 50% of that income is taxable at your marginal rate.
On the other hand, the biggest con is that you cannot write off any business expense against that capital gains income. That means no commissions, equipment or anything else. You can only write off your capital losses against your gains.
If you had some capital loss, in real estate, for example, and you lost $2,000 from that investment, you can write that off against your capital gains from your stock market losses. Therefore, your true capital gains would be $8,000, and you’ll be taxed 50% of that $8,000 at your marginal rate.
Another thing to be mindful of when you’re filing capital gains, is the “superficial loss rule” or the “30 day rule” in Canada. That means if you sold a stock for a loss, and if you buy it back within 30 days of selling it, you cannot claim the loss on that stock for tax purposes.
This, of course, is to prevent investors from intentionally manufacturing a loss in order to claim tax deductions on their capital gains. Keep that in mind.
Business Income
Now let's talk about filing day trading income as a business. You would most likely be filing that under self employment income or as a sole proprietor. You are going to be taxed 100% of that income instead of the 50%, so if you made $10K from trading as business income, that's fully taxable instead of just $5,000 if you were filing as capital gains. The amazing advantage of filing as business income, though, are the tax write offs.
Almost anything you are using to make your day trading profits can be claimed as a business expense against your income. That includes your broker commissions, platform fees, scanners, news alerts, chat services, trading courses, part of your rent or mortgage if you trade from home, internet bills etc.
The money I spend on my trading tools every year like Benzinga, trade ideas, briefing, my computer, monitors, keyboards etc, are all tax write offs.
The other sweet advantage is that 100% of any business losses are also deductible against your trading income, so if you made $10K from trading but lost $2K from your Lamborghini rental business, your true taxable business income would be $8,000 at your marginal tax rate. The same works the other way as well; your trading loss can be written off against your other business income.
Let’s look at our example here using the simple tax Canada calculator. If you make $100K a year from your employment income and another 10K from trading, when you file that under capital gains without any write offs you pay $27,669 in taxes in BC.
Contrarily, if that $10K is filed as self employment business income, you pay almost $2,000 more in taxes. However, do you remember those sweet write offs I mentioned earlier? Let’s say you spent $3,000 last year on trading DVD’s. You can write that off against your business income so only $7,000 is taxable.
In that case, you pay $28,435 in taxes. In comparison with our first example, it's not that bad.
It's pretty bad actually. Who am I kidding here? That’s almost a $1,000 difference. That's like 76.92 bowls of ramen right there.
TFSA Account
Now that we’re talking about day trading as business income, another important thing to make note of is trading in your TFSA account.
Can you day trade in your TFSA account? I get asked that a lot. The quick and easy answer is no, if your trading behavior constitutes business income, according to the 4 factors we talked about at the beginning.
TFSA stands for Tax Free Savings Account. It's meant to be used for personal savings and investing, not as an account for you to conduct business activities. There have been instances of the CRA challenging individual’s TFSA accounts in court because they assess their trading activities in their account to be business income, rather than capital gains.
If you talk to a CPA and assess your trading behavior to be closer to capital gains, for example, maybe you just swing trade a couple of times a month. Likewise, if you have another full time job, then there's nothing to worry about using your TFSA.
Conclusion
Whether you are a day trader or swing trader, the most defining factor that tells the CRA whether your trading income should be considered business or capital gains, is how often you trade and how long you hold the positions.
Each security buy and sell transaction you perform on your broker is recorded on a T5008 slip, which is a tax form that records your name, social insurance number, the kind of security you buy or sell and the dates of those transactions. Yes, the CRA has access to all of these tax slips.
Again, make sure to speak with a tax professional regarding your own situation. Do not cheap out on this. Paying taxes means you are making money. It's a good thing. If you want to live in this amazing country of Canada and enjoy all the social benefits, then you should pay your dues. You do not want the CRA going after your a$$.
