How do you file day trading taxes in Canada? And can you trade with a TFSA?
Since im a proud Canadian trader, i’ve gotten tons of requests to go over how exactly do
we do taxes for day trading income so we do not, god forbid, anger the CRA Canadian Revenue
Agency. Trust me, you do not want the CRA going after your asses.
Before I start here is a mandatory disclaimer:
I am not 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 Im 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, A stand for average.
I have never actually prepared and filed any of taxes myself. I’ve always consulted my
CPA to prepare my tax filing. But for the purpose of this video, I’ve simply booked
a business tax consultation with my CPA to discuss the details regarding day trading
and trading taxes in general in Canada.
So this video is simply a summary of what I learned after the appointment. 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 should be
capital gains or business income.
Again this video specifically took me so long to prepare, I had to book and pay for business
tax consultation with my CPA, prepare my own research with questions and drive over to
her office and took notes throughout our one hour consultation. All of that just to make
this video.
So if this video helps you out in any way shape or form, or my bad jokes made you laugh,
all I ask is for you to drop a like on the video. That would really mean the world to
me, and make that expensive tax consulting sessions well worth it.
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, its 100% taxable. Meaning if you made
$10,000 from trading, and thats filed as business income, and you’re in the tax bracket of
20%. Then you have to pay $2000 in taxes and your take home income is only $8000.
Whereas if you were filing capital gains income on that same $10K, then only 50% of that gains
is taxable. So you’d pay 20% tax rate on only $5000. That equates to paying the CRA
only $1000, and you get to keep the remainder $9000.
To answer that important question, is your trading income considered business income
or capital gains? You need to find out whether you qualify as a day trader or an investor.
And 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 all
mightly CRA’s rules.
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.
So for the first two definitions… 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. And 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.
Because day trading is my business.
Whereas if I was an investor claiming capital gains income, I most likely would just make
one or two transactions per month. Maybe ill be buying some Tesla stocks months ago when
the stock crashed to below $200, and perhaps I would be selling it right now when the stock
had just reported earnings beat and trading at $600 all time highs.
An investor isn’t making buy and sell transactions daily, and is holding a security for at least
more than a day, usually a much longer period of time for weeks, months and years. Because
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
Now for the third definition, how much time do you spend trading or even just studying
the market. 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 on the screen and
miserably alone at home, in front of a table full of smokes, beer cans, 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. Like i’ve mentioned in these videos, 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. And I’ll put in an extra 2or 3 hours in the evenings after
the market closes too.
So that amount of time a day trader generally spends on the stock market, is equate to a
standard 9 to 5 job because they are in the business of making money from daily volatility.
Whereas 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, and 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 your long investment.
The fourth factor that the CRA takes into consideration when looking at your trading
income, is whether you tapped that like button at the bottom of this video. Sorry i just
had to do it, this video really took a lot of time and moeny into researching. 0
Ok ok, The fourth factor that the CRA takes into consideration, is how substantial is
your trading income. Now this one out of all the other three I mentioned before is a little
bit of a grey 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. You day trade and make $10k, that trading income would be more
likely to be substantial under CRA definitions.
So thats why our situations would all be very different, its important to talk to a tax
professional and see whether your personal trading income should be filed as capital
gains and only 50% taxable, or as business income and 100% taxable at your marginal tax
rate.
You may have realized by now, yes I am an active day trader and yes 100% of my trading
profit is considered business income, and therefore 100% taxable at my marginal tax
rate. And i have a feeling if you’re watching this video, you probably fall under the business
income too. Just saying.
But hey, filing trading income as business isn’t that bad, well besides paying more
tax than we had hoped. Because there are lots of advantages and disadvantages to filing
either as business income or capital gains.
So 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, of course would be, only 50% of that income
is taxable at your marginal rate.
But the biggest con is that you cannot write off any business expense against that capital
gains income. So no commissions, equipment nada/ You can only write off your capital
losses against your gains.
So if you had some capital loss let’s say in real estate and you lost $2000 from that
investment. You can write that off against your capital gains from your stock market
losses. So your true capital gains would be $8000 in this example. And you’ll be taxed
50% of that 8000 at your marginal rate.
Another thing to be mindful of if 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 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. So keep that in mind.
Now lets talk about filing day trading income as business. You would most likely be filing
that under self employment income or as a sole proprietor. Sure you are going to be
taxed 100% of that income instead of the 50%.
So if you made $10k from trading as business income. Thats fully taxable instead of $5000
if you were filing as capital gains. But the amazing advantage of filing as business income
in the tax write offs.
Almost anything that 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.
So the money I spent on my trading tools every year like Benzinga, trade ideas, briefing,
same as my computer, monitors, keyboards etc, these are all tax write offs.
And 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 $8000 at your marginal
tax rate. And the same works the other way as well, your trading loss can be written
off against your other business income.
So lets look at our example here using the simpletax 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.
Whereas if you dont quality to file that $10K as capital gains but as self employment business
income. You pay almost $2000 more in taxes. But remember those sweet write offs I mentioned
earlier? Lets say you spent $3000 last year on trading DVD’s. You can write that off
against your business income so only 7000 is taxable.
And you pay 28,435 in taxes. So in comparison with our first example, it's not that bad.
Okay it’s pretty bad actually, who am I kidding here. That’s almost $1000 of difference.
That's like 76.92 bowls of ramen right there.
Now that we’re talking about day trading as business income, another important thing
to make note of is… trading in your TFSA account.
Now I get asked this a lot, can you day trade in your TFSA account. The quick and easy answer
is No, if your trading behavior according to the 4 factors we talked about at the beginning
constitutes as business income.
TFSA stands for tax free savings account. Its meant to be used for personal savings
and investing, not as an account for you to conduct business activities. There has 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.
But 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 and you have another full
time job, then there's nothing to worry about using your TFSA.
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 transactions you perform on your broker are 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. And yes the CRA has access
all 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. Its a good thing. If you want to live
in this amazing country Canada, and enjoy all social benefits, then you should pay your
dues. You do not want the CRA going after you a$$.
If this video helped you out and clarified some questions you had about day trading taxes
in Canada, please remember to drop and like and subscribe to see more day trading related
videos in the future!