Trading Taxes Canada

Like any other source of income, earnings from trading in Canada are subject to taxation. Upon selling capital or financial assets at a higher price than you bought it, you’re said to have made a capital gain. Trading taxes on capital gains vary depending on multiple factors, including your country and the holding period.

Whether you’re swing trading stocks, crypto, or forex, your gains are all subjected to taxation, as per the Canada Revenue Agency (CRA) guidelines. Understanding trading taxes can be complex. This is because you must decipher multiple obligations and rules based on your regional location. However, in Canada, trading taxes are a bit clearer than in other countries. This article brings you everything you need about trading taxes in Canada. 

Trading Taxes Classification in Canada

Like Trading Taxes in the US, the CRA classifies traders into two categories for taxation purposes. As a trader, you may fall under the “investors” or “traders” tax group. It all depends on your trading behavior to qualify for specific tax classification. 

• Investor. An investor is an individual who trades equities as an investment. Investors lack consistent trading behavior. Gains or losses made by investors are taxed as per the capital gains tax guidelines (discussed in the next section).  

• Trader. You fall under this category if you show constant trading activity. The CRA assumes that you trade primarily to make a profit. As a result, your gains and losses need to be reported as business income and losses, respectively. 

Each category pays different taxes. Therefore, determining your tax classification significantly influences how much taxes you pay. 

Taxes on Investor Losses and Income

Suppose you’re an investor who trades irregularly and infrequently, targeting long-term goals such as building your wealth. In that case, any profits you make from your investment are capital gains. As a result, the CRA will charge taxes on only 50% of your profits at the current marginal tax rate.

On the other hand, if you make a loss from your investment, this category is less advantageous. This is because the loss made is claimed against the capital gains. Also, the trading fee is subject to taxation. Therefore, despite being advantageous for obvious reasons (only 50% of your earnings are taxed), this classification has some setbacks.

For instance, through the superficial loss rule, investors end up paying huge taxes every year. This rule states that suppose a company, spouse, or investor buys back the same asset within thirty days after selling it. In that case, they can’t claim a capital loss for taxation purposes. 

Taxes on Business Losses and Income

Traders are the people who trade frequently and do it as a business activity. As a result, the CRA considers gains from such trading activities as business income rather than capital. Therefore, all gains from your trading are taxed based on the current tax rate. That said, unlike capital gains where only 50% of earnings are taxable, business income is 100% taxable. 

Similarly, 100% of your losses are deductible as well and are applied to your other income sources. Assume you make $10,000 in trading losses in a specific year. You can subtract these losses from other businesses you run or any other source of income you have. Doing so can significantly minimize the business loss taxes you pay in that particular year.

However, you need to provide proof of ownership and receipts to show you own the other businesses or items you declared when filing your tax returns. Also, a trader needs to claim all expenses associated with their trading activity. These may include internet bills, educational courses, and trading courses undertaken within the tax return period.

How Are Cryptocurrencies Taxed in Canada?

The Canada Revenue Agency treats cryptocurrencies as commodities when it comes to taxing them. As a result, any gains made from investing in cryptocurrencies are treated as either capital gains or business income based on the situation. For instance, if a taxpayer’s crypto trading activity is consistent, it is considered under the business income tax bracket. However, since some traders use cryptocurrencies to pay for goods or services, transactions under this situation fall under the barter transaction category. 

Are Trading Taxes the Same for Different Financial Instruments in Canada?

In Canada, trading taxes on different instruments may vary slightly. However, what doesn’t make any significant difference is what the trader is trading. Trading forex taxes are the same as crypto and stock taxes. Similarly, futures taxes are the same as trading options taxes.

Tax systems don’t care much about whether you’re selling or buying Tesco, oil, or gold shares. Instead, they focus more on how you do the trading activity. For instance, if you’re a frequent trader, regardless of what asset you’re trading, you’ll fall under the business income tax regime. On the other hand, if you place infrequent long-term trades, your earnings are subject to capital gains tax regime. 

How to Prepare Tax Returns with Ease in Canada

Preparing trading tax returns may not be a walk in the path for many traders. However, some tricks can ease your ability to prepare your tax returns. Here are some quick tips to get you started. 

Keep Your Trading Records

The first step to filing accurate tax returns is to have correct trading records. This is because they enable you to track your trading activities with ease. Also, you can provide your records when needed for auditing. You should maintain trading records, including:

• Buy and sale dates
• Instrument used
• Trade entry and exit points
• Size of the trade
• Price

Embrace Tax Software

The tax software can help you maintain a good track of your trading activities. Such software comes with integrated features that can smoothen the process of preparing tax returns. For instance, you can retrieve trading activity transactions and dates within a single click. This way, it saves you the time and effort needed to compile your tax returns. 

The Bottom Line

Trading taxes in Canada are more straightforward than in many countries. The country’s policies focus more on how you do your trading than what you actually trade. However, if you’re unsure about any trading tax issues, kindly contact CRA or other professional tax advisors. This way, you’ll avoid expensive lawsuits and other penalties associated with tax noncompliance.