For the average person, selling shares results in a capital gain or loss which is subject to preferred tax treatment whereby only 1/2 of the gain is included in income and taxes. However, there are cases when buying and selling stocks or other types of capital property can result in these gains and losses being treated as business gains and losses any thus losing the preferential tax treatment.
But how do you know when your trading is considered business income rather than capital gains?
The facts and circumstances surrounding the investment activity help determine if gains and losses are capital gains and losses or business gains and losses.
The courts have provided some guidance by looking to the intent of the transaction: If you acquired property with the intent of disposing of it with the intent of earning a profit the transaction is business income. If on the other hand you hold the investment to yield income, then the transaction is considered capital. Clear right? It almost sounds like the same thing.
In fact there is a distinction that we can look at the might help clarify the difference. Consider a property investor who acquires land and places the land into inventory for subsequent sale. If the land is subsequently sold, the transaction is business income. Similarly, gains earned by day traders are considered business income.
The CRA’s Position On Capital Gains
A debate on the merits of whether a transaction is capital or income can be debated at length. At the end of the day, it CRA is the deciding factor. The combination of the following factors may result in gains and losses being treated by the CRA as income and thus be subject to full tax:
- Frequent and extensive buying and selling of securities,
- Short periods of ownership,
- If you have some knowledge or experience in the industry you are investing,
- If you spend a lot of time studying the markets and securities,
- Your buys and sells of securities form part of your regular business,
- You use margin or debt to finance your purchases,
- You advertise yourself as an investment broker,
- Your purchases appear to be speculative or the securities do not pay dividends
If you are a resident of Canada, not a securities dealer
You have the option to make an election to treat all of your transactions (in Canadian securities) as capital by CRA filing form T-123 Election on Disposition of Canadian Securities.