Across the country, everyone is looking for the best ways to save and grow their money. Canadians are actively day trading stocks and investments, taking advantage of short-term market opportunities.
Day trading can generate impressive returns in a very short time. However, while investments can lead to great profits, you have to consider the day trading taxes in Canada. If you do it a lot and are good at it, it can become your job. Of course, even experts lose money on investments.
If you remain a novice or casual day trader, you can still profit nicely, and at the same time you can lose money too. That is the nature of investing.
While it may seem intimidating at first, with the proper research and risk analysis, you can invest your own money and generate income by buying and selling shares on the stock exchange. However, if you’re someone who trades a lot and generates regular income from it, it’s important you consider the tax implications.
What Is A Day Trader?
A day trader is someone who purchases and sells stocks over a brief period of time (typically within a day, as the name suggests). The goal of day trading is to receive small amounts of profit each day which ends up being a substantial amount of cash flow in the long term.
Day Trading As A Business: TFSA and RRSP Will Not Shelter Your Capital Gains
Day traders typically work full-time at it. It is a job because it involves a significant amount of knowledge, strategy, and, of course, time in order to be successful.
The income you earn from day trading can be considered as business income by the CRA. The CRA identifies day traders as a business when there’s a high amount of buying and selling and the time in between buying and selling a particular stock will be relatively short.
Another indicator for those who are investing as a business is their knowledge and experience with securities markets. If you’re considered a business, you’ll need to report your income and capital gains as a business.
Also, every time you buy or sell a security, a T5008 slip is created. This is matched to your social insurance number and name. This matching permits the CRA to match it with your tax return.
Overall, if you buy and sell investments daily like a securities dealer, and your goal is to use small price fluctuations to make short-term profits, the income should be reported as a business.
Day Trading As A Novice
You do not have to be an expert to be a day trader in Canada. A normal, Canadian investor will have a significantly smaller turnover rate (the time between buying and selling a given stock). A novice using their registered retirement savings plans (RRSP) or tax-free savings accounts (TFSA) accounts can protect their profits from capital gains tax. This type of investor normally has another job and doesn’t day trade full-time as a professional.
Does Investing Affect Your Credit In Canada?
No, investing does not directly affect your credit in Canada. However, if you get a margin account, it could affect your credit. A margin account is a type of investment account that gives you a line of credit to buy stocks. As such, when opening this account, you’ll generally be hit with a hard inquiry which could negatively impact your credit.
If you have a margin account, it’s important that you keep tabs on your credit, which you can do for free using Compare Hub. Similarly, it’s important to consider the risks involved with borrowing to invest. If you lose a lot of money and are unable to pay it back, you could be left with a lot of debt. This can not only impact your credit but your overall finances.
Day Trading Taxes In Canada
The account you’re using to make trades can affect the way you’re taxed in Canada.
Tax Rules On Day Trading In A TFSA
First things first, the CRA prevents any business activity from occurring within a TFSA. However, it is still possible to day trade within your TFSA as a novice investor. But, you must use extreme caution.
Investment income in a TFSA is tax-exempt, but not if it’s considered business income. If the CRA notices too much trading activity within your TFSA, it may be flagged.
If the CRA determines you are a professional day trader, all of your capital gains will be considered business income. As a result, all your capital gains will be taxed.
Tax Rules On Day Trading In A RRSP
Investment income within an RRSP is tax-deferred, whereas TFSAs are completely exempt. Similar to trading in your TFSA, RRSPs are meant for personal investing. It is not used to generate business income, and the CRA will flag you if your trading activity is very active.
How Are Day Trading Capital Gains Taxed?
Navigating how day trading capital gains are taxed can be a little tricky. However, below is a breakdown for you.
Day Trading Taxes In Canada As A Business
If the CRA deems your day trading income as business income, you won’t be eligible to claim the capital gains tax. Similarly, if you’re a sole proprietor, the investment income you earn from day trading must be reported as business income on your personal income tax return.
If you’re a corporation, the investment income you earn from day trading must be reported on your corporate income tax return. Any losses you incur from investing can be used as a tax deduction. However, there may be certain restrictions and limitations.
Day Trading Taxes In Canada As An Investor
If you’re buying and selling securities for a source of passive income, you can report capital gains and losses on your taxes. 50% of your gains will be taxed at your typical tax rate. Gains are achieved when you sell a stock for more than you originally bought it for, it is also important to note that if the reverse happens, that is considered a capital loss and can be used to reduce the amount of your capital gains that are taxed. If you don’t use all of your capital losses, you can carry it forward to the next tax year.
Day Trading Taxes In Canada FAQs
Is there a difference between swing trading vs day trading?
What are capital gains?
What is the capital gains tax rate?
Can a day trader claim capital gains tax?
How are stocks taxed in Canada?
Final Thoughts On Day Trading Taxes In Canada
Day trading does present a unique opportunity and career for financially minded individuals, but it is important to understand the tax implications if you choose to pursue that route. For regular investors looking to generate income, it is also important to consider whether they might actually be day traders in the eyes of the CRA.