Chances are that if you invest in the markets outside of your RRSP or RRIF,
you treat any profits you realize from your investing activities as capital
gains. The obvious advantage is that capital gains are taxed at only 50% of your
marginal tax rate. The disadvantage is that any losses incurred can only be
applied against other capital gains, not against other sources of income.
Day traders, on the other hand, who make their living by frequently buying
and selling securities, often closing out any long positions by the end of the
day, are considered to be engaged in the business of buying and selling
securities with a view to a profit and, therefore, must generally report any
profits as business income, fully taxable at their marginal rate.
While day traders cannot take advantage of the 50% capital gains inclusion
rate on their profits, they are able to deduct 100% of any trading losses
against other sources of income.
But what about someone who has two accounts: One used exclusively for
day-trading activities and the other for long-term investing? Is it possible to
report profits on the day-trading account as income, while the profits from the
long-term account are 50% taxable capital gains?
That was the question posed to the Canada Revenue Agency, which released its
technical interpretation to the public last month.
The whole issue of whether profits from securities trading should be treated
as income or capital is not a new one and predates day trading.
In 1984, the CRA revised its bulletin entitled Transactions in Securities,
listing several factors to determine whether a taxpayer's activities constitute
a "business."
These factors include the frequency of transactions, the period of
securities' ownership, investor's knowledge and experience in securities
markets, whether the transactions form a part of a taxpayer's ordinary business,
as well as the amount of time spent studying the securities markets and
investigating potential purchases.
Not surprisingly, the CRA's general position is that given the frequent
transactions and short period of ownership associated with day trading, gains or
losses from day trading are generally considered to be income and not capital
gains.
As for having two separate accounts -- one for day trading and one for
long-term investing -- the CRA acknowledged that it may be possible for the same
taxpayer to legitimately hold some securities as an investment and other
securities on income account, but that "such situations are rare." The CRA's
initial presumption is that any gains or losses on securities transactions by
the same taxpayer must be treated consistently.
Nevertheless, the CRA concluded by saying that if an investor wishes to
establish otherwise, he or she must be able to demonstrate that each distinct
pool of capital is being managed separately -- one with a view to producing
short-term gains on an income account, and the other with a long-term investing
focus.
- Jamie Golombek, CA, CPA, CFP, CLU, TEP is vice-president, taxation and
estate planning, at AIM Trimark Investments in Toronto.
jamie.golombek@aimtrimark.com