Is It A Capital Gain or Income?

by Tax Guy - Burlington Accountant on June 4, 2008 Print This Post Print This Post

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.

About The Tax Guy...

Dean Paley CGA CFP is a Burlington accountant and financial planner who services individuals and business owners locally, nationally and internationally. Dean has appeared in the National Post, Toronto Star and Metro News.

To find out more, visit Dean's website Dean Paley CGA CFP or connect via Twitter @DeanPaleyCGACFP.

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{ 12 comments }

mandy April 13, 2013 at 1:15 pm

Hi,
Quick question, if i sold shares and have a proceed from selling the shares, does that get included in investment income on the schedule 4 form?

Tax Guy - Burlington Accountant April 13, 2013 at 2:05 pm

Hi Mandy,
The capital gain is the difference between the proceeds of the sale andthe original cost. These are reported on schedule 3. The income (interest and dividends) are on schedule 4.

mandy April 13, 2013 at 2:15 pm

Thanks for answering.
Also, if the form i received doesnt show the cost but only proceeds and commission, do i still need to subtract it from the original cost?

Thanks again!

Tax Guy - Burlington Accountant April 13, 2013 at 2:17 pm

Yes.

mandy April 13, 2013 at 2:26 pm

Thanks again for all your help!

mandy April 13, 2013 at 2:32 pm

oops, one more question. what if I cant find the original cost? is it okay if i dont claim the capital gain on them?

Tax Guy - Burlington Accountant April 13, 2013 at 3:03 pm

You must report a gain or loss. If there is a gain and you knowingly do not report it, then you may be in some hot water (tax evasion). The CRA know’s you sold the security as it is reported to them on a T5008.

If these were shares, the prices are available and you should know when you purchased them.

mandy April 13, 2013 at 3:33 pm

thank you

mandy April 15, 2013 at 8:54 am

I actually ave another quick question.
I received form from TD Asset Management Inc for the monthly income fund contribution. do i have to include this somewhere?
All it says on the form is to attach it to the income tax return but doesnt say where to include it.

thanks again for your help!

Peoria November 11, 2013 at 1:20 pm

Greetings- My husband and I live off our investments (interest, dividends, capital gains) from mutual funds, stocks, bonds, and annuities. We do not really have other income. We are not day traders or anything like that, and we are not a business. So, in our case, will it be considered “capital gains” or “income”? Thank you for your time and advice. Regards, Peoria

Tax Guy - Burlington Accountant November 27, 2013 at 3:49 pm

The interest and dividends would be income. The remainder would likely be capital gains.

Peoria November 29, 2013 at 9:17 am

Thank you.

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