It was once said that there are only two things certain in life; death and taxes. I wouldn’t be lying if I told you I’d spent many a night trying to think up creative ways to “avoid” taxes. Or, shall I say reduce my taxable income. This is where things get dicey for traders. If you think your profits from day trading are free and clear, think again. Come April 30th, the Canadian Revenue Agency (CRA) has plenty of creative ways to tax your profits.
And, even more troubling, if you’re not smart about your deductions or have a savvy accountant, the CRA might have a different definition of what you’re up to. Should you be concerned? Absolutely. Should you avoid day trading altogether because of the taxman? Absolutely not. To help put your concerns at bay, I decided to blog about the importance of understanding Canadian day trading taxes.
Do You Fit the CRA’s Day Trader Criteria?
First things first, the taxman will deem you a trader if you meet some, not all, or the criteria below:
- You have a history of buy and selling an “extensive” number of securities. And in typical government fashion, they don’t define “extensive.” But, if you’re in the game of buying and selling hundreds of securities each year – as most day traders do – you’ll likely be considered a day trader.
- You only own securities for a short period of time. Again, no definition from the government on what constitutes a “short period of time.” But, you can safely assume they’re not referring to securities held for years – think days.
- You have “experience” in securities markets; perhaps you work at a trading firm.
- You dedicate a “substantial” amount of time studying the market. Once again, that’s up for you to define.
- More often than not, you buy on margin or use some other form of leverage.
- You tell people or made it known you’re a trader. This is a no-brainer in the eyes of the CRA.
- You purchase a majority of stocks that are speculative or non-dividend paying.
Even if you have a full-time job outside of the trading world, you could still be classified as a day-trader. Therefore, do expect a heftier tax bill at the end of the year as you’ll be paying tax on your total income earned.
Let’s Define Income
One would think income is a pretty straightforward concept but not so much in the tax world. In the CRA’s eyes, income falls into different categories. With each different category comes different taxation rates, deductions and forms to painstakingly fill out. So, to understand taxes as a Canadian day trader, you need to learn the different types of income.
Earned Income for Canadian Day Trading Taxes
Well, this is money you earn, whether it be through wages, salaries, bonuses and or tips. In other words, money that you earn on the job. And if day trading is your job and you actually make money from it, these earnings likely will be considered earned income.
If day trading is your only job, all your profits will be taxed at your marginal tax rate – a.k.a, your personal income tax rate.
The concept of marginal and average income tax rates can seem a bit confusing, so I’ll do my best to explain each one clearly. Your marginal tax rate is the rate of tax you pay on each additional dollar of income. Your combined marginal tax rate includes both federal and provincial rates.
Canada has two tax rates, one that varies with the province you live in and one that’s fixed, or the Federal rate. In our Federal system, you’re taxed:
- 15% up to $48,535 of taxable income
- 20.5% between $48,535 and $97,069
- 26% between $97,069 and $150,473
- 29% between $150,473 and $214,368
- 33% on any amount exceeding $214,368
Now, this doesn’t include the taxes you pay to your provincial government. In Nova Scotia, for example, you’re taxed:
- 8.79% up to $29,590 of taxable income
- 14.95% between $29,591 and $59,180
- 16.67% between $59,181 and $93,000
- 17.5% between $93,001 and $150,000
- 21% on any amount exceeding $150,000
Put another way, if you fall into the highest tax bracket, 50% of your income goes to the government. Ouch. However, since most day traders are self-employed, they look to deduct as much as they can in the form of expenses to reduce their taxable income. If you’re savvy and know the rules, you can bump yourself into a lower tax bracket.
The Benefit of Claiming Your Trading Gains as Income
Besides the fact that it’s illegal not to claim your gains, you have one huge advantage by doing so. If you lose money, you get to deduct those losses against all sources of income or profits you make down the road.
This translates to more money in your pocket as the losses bring down your tax bill for those of you with another job. What’s more, you get to carry those losses forward indefinitely!
Handy Tip for Canadian Day Trading Taxes
Be sure to keep your earnings from your long-term investments, like mutual funds, separate from the money you make day trading. If you make a mistake and pool all the profits together, the CRA will mistakenly assume all your investment gains are from trading. That will be a costly mistake as it likely will bump you into a higher marginal tax bracket.
If you like your free health-care, education and roads, you can thank your tax dollars. Taxes aren’t inherently bad, just potentially devastating to your bottom line if you haven’t planned for them. This is why, before you start day trading, you need to consider the tax implications of the trading strategy you decide to go with.
Let’s Talk About Capital Gains and Losses
In case you’re wondering, a capital gain is a profit you make from buying low and selling high. And, this is no different when day trading stocks; you buy low, sell high and pocket the difference. By joining the Bullish Bears, you will learn how to enter a stock correctly, so you’re not buying high and selling low.
As a day trader, you don’t want to pay taxes on your earned income; you want to pay taxes on capital gains. Why? Because only half of a capital gain is taxed. Let me give you an example to illustrate.
If you made $1,000 on GameStop and it’s taxed as income, the entire $1000 gain will be subject to tax. No thanks. However, if you’re paying capital gains, you only pay tax based on your marginal tax rate. And in this case, you’re only paying tax on $500. The good news is that if you sell an asset for less than what you paid, you can offset some of your losses in the form of a capital loss.
And this applies to those who lose money on a trade (I can relate). Similar to capital gains, you can only apply half of your loss. A capital loss allows you to reduce your tax burden, which is something we all should strive to attain.
Understanding the Superficial Loss Rule
Also known as the “30-day rule”, if an investor, a spouse, or a company they control buys back an asset or similar asset within 30-days of selling it, they cannot claim the capital loss for tax purposes. This rule trips up many traders each year, costing a considerable amount in taxes.
Many a trader who has banked big profits get obliterated come tax time because they failed to track their gains and losses. The price difference of every trade must be accounted for. To prevent this from happening to you, I suggest you either sign up for a program that tracks your trades for you or create your own excel spreadsheet. You should keep details of the following:
- Purchase & sale date
- Entry & exit points
What Can You Deduct as a Day Trader?
I hope by now I’ve convinced you that it’s in your best interest to reduce your taxable income as much as possible. Here are some things you can deduct against your day trading income.
Clerical, Legal & Accounting Fees
Office Expenses (computer, desk, chair, pens, paper, internet)
Investment Advice and Council (books, magazines, newspapers. Basically anything that helps you to refine your trading strategy)
Safe Deposit Box Rent – you can deduct the rent if you store any investment-related documents.
Investment Interest – if you borrow money to trade, as many day traders do, you can deduct the interest on the loan.
Please remember you can only deduct expenses if day trading is your day job and you’re getting taxed on earned income. Paying income tax as opposed to capital gains tax will enable you to claim all the items above. You might need to pay more in tax than if you just paid gains, but you can write off more.
Canadian Day Trading Taxes Final Thoughts
We’re not here to give you investing advice, but it’s important to understand the day trading tax implications as a taxpayer. Sometimes, just seeing the amount of tax you actually pay is enough to get you motivated to find ways to pay less income tax. While you can learn quite a few things on TikTok, you can learn a lot more about trading, investing and the stock market right here at Bullish Bears!.