Trading Stocks And Income Tax

by Tax Guy - Burlington Accountant on August 23, 2008 Print This Post Print This Post

The term “shares” refers to the capital stock of a corporation and in common use may be referred to as , common shares, stocks, and preferred shares.

In very general terms, investments in shares can produce dividend income as well as generate capital gains and losses.

Shares Held Outside Registered Accounts (RRSPs & RRIFs)

Capital Gains & Losses

Simply stated a capital gain is the difference between what you paid for an investment and what you subsequently sold that investment for. Under Canadian tax law, capital gains and losses are only reported in income when they are realized. That is a capital gain or loss will only be reported when an investment in shares is actually sold (and in some circumstances, given away). However, for tax purposes only ½ of the net gain or loss is included in income.

The adjusted cost base of the purchase is the amount you paid for the shares including any brokerage commissions. If the shares were originally purchased prior to December 31, 1971, the adjusted cost base is the Valuation Date amount established by the Income Tax Application Rules (ITAR).

If you have purchased shares in the same corporation over a period of years (i.e. at different times and prices), the cost basis of the shares sold is determined on a weighted average basis: The purchase price paid for all of the shares is divided by the number of shares.

Example:

John bought shares of XYZ Corp.

January 15, 1995 – 150 Shares @ $25.50 each plus brokerage fees of $75.00

September 1, 2000 – 500 shares @ $42.50 each plus brokerage fees of $75.00

John’s adjusted cost base is as follows:

(150 x $25.50) + $75.00 + (500 x $42.50) + $75.00 = $25,225

The adjusted cost base per share is:

$25,225 / 650 = $38.8077 per share.

John sold 250 of his shares of XYZ Corp. on March 10, 2007 and received $65.00 per share and paid $75.00 in brokerage fees.

John’s proceeds of disposition:

(250 x $65.00) – $75.00 = $16,175

The capital gain and amount to be included on his 2007 tax return:

Capital Gain: $16,175 – (250 x $38.8077) = $6,473.08

Taxable capital gain (1/2 of $6,473,08) = $3,236.54

The proceeds of disposition represent the amount you actually received from the sale less and brokerage fees.

The difference between the proceeds of disposition and the adjusted cost base is the capital gain or loss of which only ½ have of the gains will be included in income. Any net capital losses that are unused may be carried forward indefinitely.

It is important to note that you will not receive a tax slip from your broker for capital gains and you will need to calculate, record and report this on your income tax return manually.

Dividends

Common and preferred shares may also pay dividends. This receipt of income has a preferential treatment depending on whether the dividends are from Canadian corporation and deemed eligible or ineligible or if they are from foreign corporations.

Normally you will receive a tax slip from your broker or the transfer agent indicating the appropriate dividend amounts and credits to report. If the shares are in private companies or foreign companies you may not receive a tax slip but are still required to report this income for tax purposes.

Canadian Corporations

Dividends from publicly traded companies (i.e. shares listed on a stock exchange) are typically considered eligible dividends although from time to time all or a portion of a dividend may be ineligible.

Eligible dividends are grossed up by 45% and then receive an enhanced dividend tax credit whereas ineligible dividends are grossed up 25% and receive a lower tax credit. For more information, please refer to the Combined Federal & Provincial Marginal Tax Rates & Taxes Payable by Taxable Income on our Tax Rates page.

Foreign Corporations

Dividends from foreign corporations do not receive preferential treatment and are treated as straight income for tax purposes. There is no gross-up and no tax credits applicable to foreign dividends. The dividends received will be subject to a foreign withholding tax to which a tax credit may be claimed on your return.

Dividends received from foreign jurisdictions must be converted to Canadian dollars either on the date of receipt of the dividend or the average exchange rate for the year to determine the amount to include in income.

Shares Held Inside Registered Accounts

Shares held inside a registered account can grow and dividends received free of tax. Funds contributed to the account were deductible when placed inside the account and are thus fully taxable when withdrawn.

Shares in public companies are best held outside registered account as the tax consequences are much better, although this must be balanced against the tax refund that would be available for a contribution.

Note that dividends received from foreign jurisdictions, in many cases are not subject to withholding tax.

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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{ 15 comments }

Irfan September 13, 2008 at 10:49 am

so in that example, what is the new adjusted cost base after John has sold 250 shares?

Tax Admin September 13, 2008 at 8:38 pm

Before the sale the adjusted cost base (ACB) per share was $38.8077 per share. Since there were no additions to the holdings and only a disposition the per share ACB remains the same. Thus the ACB for the remaining 400 shares is $15,523.08.

W Pechie November 6, 2008 at 5:21 pm

Can a business registered in British Columbia Canada invest money in the stock market rather than just sit in the bank and earn a small return. What are the rules governing this?

Tax Admin November 6, 2008 at 5:41 pm

Any corporation can invest in shares of another public company. However, the income earned from these investments are considered passive investment income and excluded from income of the corporation for the purposes of the small business deduction. If the dividend income is flowed out to you via a dividend in the same year, then there is no little difference between investing inside the corporation that outside. Leaving dividend income inside the corporation could cost you approximately 15% more tax in BC (the range for all provinces 5% to 17%).

Capital gains earned on passive investment income result in slightly higher tax.

Philip Madonia November 28, 2008 at 12:45 am

Is the average adjusted cost base applied to shares purchased within a tax year? Do we effectively calculate an average cost per share to determine gain/loss on partial sale of same shares, and if so, do re-purchased shares (outside of 30 day rule) also effect average price so that it is ineffectual to sell and re-purchase in same calender year in order to take capital loss. If so, what is the point of the superficial loss rule, does it not do exactly the same thing as the average adjusted cost formula.

Phil

Tax Admin December 1, 2008 at 9:49 pm

The adjusted cost base is the price paid, plus any commissions paid to the broker. The adjusted cost base per share is the total cost paid plus the total commissions paid divided by the total number of shares owned.

If shares are re-purchased within 30 days of disposition, the loss is added to the adjusted cost base but the gain is taxable. If the shares are re-purchased after 30 days, then the price paid plus brokerage fees is added to the weighted average adjusted cot base.

Philip Madonia December 17, 2008 at 5:18 am

I’m a little confused about last answer, maybe an example will help.

Assuming I buy 500 shares of X at $32.00 and 500 at $38.00, ignoring commissions for now. Then I sell 500 at $38.00. I will have a gain of $1500.00 to declare and 500 shares with an ACB of $35.00. Assuming I sell the 500 at $29.00 just before end of year and buy them back within 30 days for $29.00. Will I then still declare a gain of $1500 and have an ACB of $35.00 ($29.00 plus $6.00 per share loss)?

If on the other hand I wait 30 days to re-purchase at $29.00, I declare no gain and an have an ACB of $29.00/share.

Phil

Tax Admin December 17, 2008 at 12:04 pm

I’m a little confused as to which of the 500 shares you have sold.

If you sell the remaining 500 shares for $29 you will have a loss of $3,000 and if both trades occurred in the same year you will have a net capital loss of $1,500.

If you buy back the shares within 30 days of the sale the amount of the gross loss per share is added back to new shares acquired.

Philip Madonia February 9, 2009 at 9:14 pm

I understand what you say above, therefore, if I buy back the shares within 30 days, I am left with he capital gain of $1500 and the disallowed loss is added to the ACB of the purchased shares, correct?

John Lee March 22, 2009 at 10:12 pm

Just a question regarding bankruptcies:

If I bought company A in year 2000 for $1000 and the company went bankrupt and they became delisted from the stock exchange in year 2006, is this considered a capital loss, even though I haven’t technically sold them?

Tax Guy March 23, 2009 at 8:09 pm

Hi John,

Being de-listed does not mean you can claim a loss. The company must stop operating or be wound up in order to claim the loss. If the company has ceased operating or is wound up you make an election to claim the loss: You are deemed to have disposed the shares for nil value and the immediately reacquired them again for nil. If the company is revived and begins operation your new ACB is nil.

If the company has not ceased operations or is wound-up, then the only way to claim the loss is to sell the shares or transfer the ownership to an unrelated third party (or donate them to a charity willing to take the shares).

b edwards September 3, 2010 at 10:37 am

I have been looking for the answer to this one for a while (probably would have spent less time waiting on the phone for a CRA rep, actually): I have shares in the same company in two different non-registered trading accounts. If I sell shares from just one of those accounts, can the ACB be calculated from the share purchases made in that account, or must I calculate from both accounts?

Tax Guy September 3, 2010 at 9:18 pm

No. The ACB is the weighted average per share of all of the shares of a company.

Joe Smith July 6, 2012 at 2:51 am

Hello
If I live and work in a foreign country (Japan) and pay income and residency taxes there (Japan) can I get tax credits and get money back for loses in a Canadian Trading account (Q-Trade)? I am a resident of Canada, but have not filled my taxes there in a few years since I don’t live and work there anymore.

Tax Guy July 6, 2012 at 8:49 am

Hi Joe,

You’ve made a comment that is interesting. You mention that you’re a resident of Canada but have not filed a Canadian tax return since live, work and pay taxes in another country.

I suspect that you are saying that you hold Canadian citizenship but no longer live and work in Canada. It may very well be that you are not a resident of Canada for tax purposes. If this is the case, you have no liability for Canadian tax and have no need to file a Canadian return (the CRA would not likely accept it).

It may very well be that you should be reporting and claiming credits/deductions under Japanese tax law for the gains/losses in your account.

If you are still a resident for tax purposes, then you should have been filing and paying Canadian income tax all along (there are rules between Japan and Canada that reduce or eliminate double taxation).

The first issue to address is your actual tax status in Japan and you tax status in Canada and then look for treaty remedies for any conflicts. At that point you will know where you will be taxed and what the rules are.

Feel free to contact me directly and I can provide a consultation and review your past Canadian tax returns, residency status, and provide better advice or guidance on your matter.

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