Tax Tip[] Capital vs. Income

Hey, Day Trader

“gains that are treated as income can be taxed at the lower rate of 15.5%” 

Many people assume that gains from trading marketable securities are capital gains, taxed at half the rate that regular income would be taxed at. Well, as Felix says in “The Odd Couple”, you should never assume (Why Felix Says Don’t Assume). 

Whether gains or losses on the trading of securities are capital or income is a question of fact. Administratively, the CRA allows most individuals to treat gains from the sale of securities as capital gains where jurisprudence would say they are regular income. An election is available in the Tax Act to commit the taxpayer and the CRA to capital treatment. However, this election is not available to “traders or dealers” of securities, financial institutions, non-residents and corporations in the money lending business. It is not only registered or licensed professionals who are considered traders or dealers in securities. Taxpayers who are not registered or licensed may be considered to be traders or dealers in securities based on the relevant facts.    Some of the factors to be considered include: 

  • Frequency of transactions
  • Period of ownership
  • Knowledge of the securities market
  • Do security transactions form a part of the taxpayer’s ordinary business
  • Time spent on studying the securities market and investigating potential purchases; and
  • Method of financing 

Income treatment is not necessarily a bad result, especially if the trading is performed in a corporation. If the corporation is a Canadian Controlled Private Corporation (“CCPC”) gains that are treated as income can be taxed at the small business deduction (“SBD” rate of 15.5% (Ontario rate used for illustration purposes) versus as much amounts that could exceed 49% if earned personally. In various technical interpretations the CRA has confirmed that a corporate trader or dealer in securities would likely be considered to be carrying on active business eligible for the SBD on the first $500,000 of income ( $350,000 in Nova Scotia and $425,000 in Manitoba).


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.

Sale of Shares Deemed Business Income

“Facts are key to determine tax treatment of share sales, not the classification on the tax return.”

In the recent case of Hawa (2006 TCC 612), the issue was whether the taxpayer had incurred a non-capital loss or a capital loss on the sale of shares in 2000 and 2001. In 2001, the taxpayer had 151 purchases and many sales of stock through two brokers. When the taxpayer filed his tax return, he mistakenly reflected capitallosses instead of non-capital losses for the years 2000 and 2001.

The CRA’s main argument as to why the losses should be on account of capital and not on account of income was that the taxpayer had reflected the transactions as capital losses in his tax return. The judge quickly dismissed the classification on the tax return as irrelevant. Instead, he said that the facts of the case must be reviewed in order to determine whether the taxpayer was carrying on a business or not. The judge clearly stated that based on the “volume of trades, the rapidity of turnover and the appellant’s own testimony that he was buying and selling shares to realize a profit indicate that the concerted activity of the appellant was clearly the carrying on of a business.”

The judge also stated that the taxpayer was not carrying on an adventure in the nature of trade but was carrying on a business. He stated that the volume of transactions was not an adventure in the nature of trade but was a business.

This is a case that appears to be obvious, given the volume of transactions that occur.However, this is also a good indication of the importance of filing the tax return properly.If a taxpayer reports the wrong amounts or classifies the transactions improperly, and then tries to correct them, it is likely that the CRA will challenge the change even if it is correct.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.