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An Overview of Day Trading Taxes in Canada

Written by Jessica Steer
While purchasing stocks and other investments has become quite popular recently in Canada, many people don’t realize that once these stocks are cashed in, they are considered to be income, meaning you need to pay taxes on them.
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    This becomes especially important when you start using investments as your main income source or even start day-trading. This is considered to be a business and there are processes set up for write-offs when doing your taxes. No matter how much you make through investing, you need to claim it since it is income. When you start day trading there are a few rules to follow when claiming your investment income.

    Is day trading legal in Canada?

    When we think about trading in stocks or other investments, the first thing that comes to mind is wall street. Is this something that’s done around the world and not just in the United States? Yes, it is. Day trading is actually quite common in other countries, especially Canada. Not only is it popular, but it is also legal. It is considered to be a legitimate source of income according to the Canada Revenue Agency.

    What does the CRA consider day trading?

    According to the Canada Revenue Agency, a day trader is someone who makes a living by managing investment transactions or someone who works in the industry and makes frequent trades in a short period of time. No matter how much or how often you trade any income is taxable, but you are not considered to be a day trader until you start making more than your other sources of income or use it as your only source. It is important to keep track of how much you spend, how much you earn and any other important information that needs to be reported to the CRA.

    What are the rules for day trading and TFSAs?

    TFSAs, also known as Tax-Free Savings Accounts, have started to become quite popular for those who wish to become day traders. While it is technically allowed to trade through a TFSA, it also isn’t recommended. The reason for this is that any money deposited into these accounts earns interest that’s tax-free. Because you are supposed to pay taxes on this money, it becomes tricky. The idea behind these accounts is to slowly earn interest over time. Just like other types of accounts, there is a certain amount you are allowed to put into a TFSA per year without being penalized.

    While you can put investments into a TFSA, the money that you deposited before interest will still be taxed, even though the interest is tax-free. Whether you claim this income or not, the banks supply this information to the CRA every year, so it is important to do your homework and even get your financial advisors’ advice before you start investing in your TFSA.

    It is also important to keep in mind that the amounts you are trading in these accounts make a big difference regarding your taxes and what you are taxed on. To be classified as a day trader you need to be trading frequently so this income comes from short-term investments. Long-term investments are what these accounts are designed for so there may be better account options to invest or trade your day trading income from.

    What types of investments can be put into a TFSA?

    1. Cash – Just like any other type of savings’ account, you can put cash into a TFSA and earn interest on it over time.
    2. Mutual Funds – These are different kinds of securities, like stocks and bonds, that you can invest into your TFSA and earn interest tax-free. These are meant to be long-term and can be discussed at any financial institution.
    3. Bonds- You can hold government or corporate bonds in your TFSA. Both have risks but are considered to be relatively safe investments.
    4. Guaranteed Investment Certificates – These are also considered to be safe because you are likely to receive your initial investment back, while you do earn money on GICs in a TFSA, they do have to be locked in for 1 to 5 years in most cases, so they are considered to be a long term investment.
    5. ETFs – These can also be kept in a TFSA and usually have much lower fees than mutual funds.

    How much do day traders make?

    What you can earn as a day trader yearly in Canada ultimately depends on what you invest in, how much capital you choose to invest, what securities markets you work and how much research you choose to do. That being said, the average salary of a day trader in Canada is $67,995 which is higher than the income of an average Canadian which is $54,360.

    Many people think investing or becoming a day trader is a way to make money fast when, in reality, it takes a lot of knowledge and research to know which investments to purchase and sell, as well as keep track of the patterns to try and get the best return on your investment. Day traders make multiple investments and sales per day and watch the markets all the time. A lot of time and effort is involved just running any other type of business. You also need to start with some form of capital and carefully decide on moves to make in order to not lose that capital.

    Even with the time and research that’s required, being a successful day trader also involves a little bit of luck. It is impossible to make 100% accurate when day trading. Investments are unpredictable and sometimes unpredictable things happen. At some point, every trader loses something. The idea is to make smart investment decisions to reduce the risk of loss or be prepared for when it happens.

    How are day traders taxed in Canada?

    When claiming your income on your taxes it can be slightly complicated on how your day trading capital gains are taxed. Capital gains are the amount you earn when you are selling securities for more than you paid. How you calculated the taxes on these depends on if the capital gains are considered to be business or investment income.

    Business Income

    Whether you can claim the capital gains tax has a lot to do with whether you are your own business or a corporation. If you have your own business (make your income solely or mainly for day-trading) you need to report your income as business income. A corporation needs to report any day trading income on their tax return as well. It is also important to report any losses that you incur while investing. While there are some restrictions, these losses can be used as tax deductions.

    If the CRA considers you to be a business your losses and gains are calculated as business income you can claim 100% of them. You can also claim any expenses related to your day trading business which does help reduce the amount of taxes that you will pay. These can be anything like:

    • Computer purchases
    • Monthly internet bill
    • Educational resources and courses

    Investment Income

    If you are using investments as passive income instead of running a business, then you can report capital gains and losses and they will be taxed based on your income. You can also carry your capital losses to the next year if you don’t report them. Trading fees for investors are not tax deductible and your capital losses can only be used to get rid of or reduce your capital gains. There is also the superficial loss rule to consider which ends up costing investors a lot of tax money.

    What is the capital gains tax rate and how to calculate your capital gains?

    The capital gains tax rate is based on your income and what tax bracket you fall into. Only 50% of your capital gains are taxed as a regular investor.

    In order to calculate how much you're paying, you first need to determine what your capital gain is. First you take away any fees then look at the amount you sold the investment for. You then subtract the original amount you purchased it for, and that will give you the amount of your capital gain. Cut that amount in half, and that’s what you’ll pay tax on. As a day trader, you've likely held that income for less than a year, so it’s subject to normal income rates that is decided based on your annual income.

    Are futures, swing trading, and options taxed any different?

    The CRA doesn’t tax you based on the types of investments that you trade; they tax you based on capital gains. As mentioned above the capital gains are taxed at 50% for a regular investor at your marginal tax rate.

    What are the CRA’s rules for day trading?

    When it comes to day trading in Canada, there are fewer rules in the income tax act than when trading in the United States and going by U.S. rules. However, if you are trading American investments then the U.S. rules still apply. If you are just trading Canadian investments, there are a few rules you need to abide by. It is important is claim your taxes correctly in order to claim your capital gains and capital losses.

    Superficial Loss Rule

    If you are already a day trader, you have heard of the superficial loss rule or what is also known as the “30-day rule”. This is the most important rule when it comes to day trading in Canada. The reason this is called the “30-day rule” is that it applies to 30 days from the date of sale and 30 days after. If a capital loss happens during this period of time, they call this a superficial loss, and you are unable to claim it on your taxes. The reason this rule is in place is so the seller does not trigger a capital loss after they sell to then rebuy immediately.

    The superficial loss rule is the rule CRA uses to help with claiming capital gains and losses and what you are able to claim. The rest is based on your investment income and what tax bracket you fall into. It is important to also remember, that while day trading income is allowed to be invested day trading income into TFSAs and RRSPs (Registered Retirement Savings Plan) as long as you claim it, depending on how much you invest into those accounts, you do run the risk of the interest earned on those amounts being taxed as well.

    Pattern Day Trader Rule

    The Pattern Day Trading rule comes into effect if you trade over a certain amount of US stock. Essentially if you effect 3 or more stock or equity options in a 5 day period you’re then considered to be a Pattern Day Trader. Because of this, you will need to maintain a minimum of $25,000 USD in order to continue trading. This only applies to US stock though, not Canadian stock. You’re also allowed to keep the funds in CAD, as long as they’re equal to $25,000 USD.

    What is the best tax structure for day traders?

    When claiming your taxes as a day trader, there isn’t a ton of difference between investment incomes and other businesses. Because day traders are considered to have a business it is important to keep track of your capital gains and losses. It is also possible to claim any capital losses in the next tax year if it makes sense to roll them over.

    There isn’t a larger variety of tax structures set up for day traders, so the best option is to gather all your information and discuss it with an accountant. They will help you decide the best way to file your taxes and advise you if you are eligible to claim your capital gains and capital losses.

    Can Day Traders Incorporate?

    In short, yes you can incorporate as a day trader. However, it may not be as beneficial to you as it is for other businesses. It can be cheaper from a tax perspective but the paperwork involved with day trading can be a lot more complex. It would be best to speak with a tax professional to see what the best option is for you.

    Conclusion on day trading taxes

    Ultimately, in Canada, whether you invest part-time or full-time, you must pay taxes on that income. How you pay those taxes and what you pay depends on if you keep your receipts, keep track of your capital losses and capital gains, and follow the superficial loss rule. If day trading is your main source of income there are a ton of deductions available, and just like any business, the more organized you are the more you can save on your taxes. If you are unsure where to start, or just want to make sure you are filing correctly and getting the best return possible, an accountant can help you file and guide you what you need.

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