“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.