Capital Gains vs Business Income on stock investments

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Wing
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Capital Gains vs Business Income on stock investments

Post by Wing » 22 Dec 2017 12:53

Read something online saying it's possible for stock investments gains to be treated by CRA as business income (ie. 100% taxable) and not capital gains (50% taxable).

Gains will be treated as business income if:

1. Intention of buying the assets to be sold for a profit
2. A lot of transactions during the year
3. Assets are being held for short periods

Well, for #1, I don't think anyone will buy something with the intention of a loss.

Re #2, how many is "a lot"? Is 50 a lot, 100 a lot? With the convenience of electronic trading, I tend to split say, $15k total investment of a security to 3 entry price points and likewise when selling. So, merely investing in 1 security during the year will easily trigger 6 transactions (3 purchasing, 3 selling).

#3, how short is "short"? Is a month fine? Or it needs to be 6 months, a year to avoid holding the asset too "short"?

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Re: Capital Gains vs Business Income on stock investments

Post by IdOp » 22 Dec 2017 13:56

One good item to begin researching these questions with is CRA's bulletin IT459 Adventure or concern in the nature of trade.

Searching for some of the terms above may lead you to previous discussions on the forum.

Here is a Tim Cestnick article: Frequent stock trades may complicate tax filing - The Globe and Mail (2002).

Hope that helps.

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Re: Capital Gains vs Business Income on stock investments

Post by OhGreatGuru » 22 Dec 2017 16:49

CRA may rule that you are "in the business of trading", not investing. In which case net income is taxed as business income. The criteria for this are somewhat subjective, but frequent traders, particularly day traders, are most at risk for this kind of ruling.

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Re: Capital Gains vs Business Income on stock investments

Post by AltaRed » 22 Dec 2017 17:18

I agree it is subjective and may depend on a number of things besides just the frequency and number of transactions. It may include consideration of what portion of your income/gains comes from 'trading' and whether one is a accredited professional. CRA recently cracked down (or is cracking down) on people who were able to generate 'outsized' TFSA accounts and the anecdotes tended to suggest the individuals were professionals(?) with large volumes of trades.

I suspect it could take hundreds of trades to fall into the jaws of CRA but perhaps you could advise us if you get tagged?

As an aside, frequent trading can seem to be successful during bull markets, but the same investment gains may have been achieved by staying invested. We will never know since we tend to not hear from HFT folks benchmarking their results. HFT is more likely to hand one's head to oneself when the market turns the other way.
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Re: Capital Gains vs Business Income on stock investments

Post by deaddog » 22 Dec 2017 19:01

AltaRed wrote:
22 Dec 2017 17:18
As an aside, frequent trading can seem to be successful during bull markets, but the same investment gains may have been achieved by staying invested.
This has been my experience. Staying the course would produce the same or better returns,with a few exceptions when a specific stock falls hard and does not recover.
We will never know since we tend to not hear from HFT folks benchmarking their results. HFT is more likely to hand one's head to oneself when the market turns the other way.
HFT or day trading is probably the most risk free in a down market as the trader is in cash each night and doesn't get caught in overnight gap down moves. They sleep good at night knowing they have nothing at risk. :)

To the OP; You can elect how you want to be taxed.

The advantage of being taxed as a business is that you get to write off legitimate business expenses such as the cost of computers, subscriptions to research and of course the annual trip to traders expo in Vegas.
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Re: Capital Gains vs Business Income on stock investments

Post by Wing » 23 Dec 2017 13:13

I'm not in frequent trading by any measure. I only have about 30 transactions a year with holding periods at least 1 month for each sale, less than 10 sales in the year. Only I sometimes have the habit to buy/sell securities in multiple lots to avg costs down/maximize profits. Looking into buying inverse (ie. bear) ETFs as well. So wondering if these will turn my capital gains to be treated as business income. I know "short sale" is income but not sure if gains on buying/selling bear ETF is.
AltaRed wrote:
22 Dec 2017 17:18
I agree it is subjective and may depend on a number of things besides just the frequency and number of transactions. It may include consideration of what portion of your income/gains comes from 'trading' and whether one is a accredited professional. CRA recently cracked down (or is cracking down) on people who were able to generate 'outsized' TFSA accounts and the anecdotes tended to suggest the individuals were professionals(?) with large volumes of trades.

I suspect it could take hundreds of trades to fall into the jaws of CRA but perhaps you could advise us if you get tagged?

As an aside, frequent trading can seem to be successful during bull markets, but the same investment gains may have been achieved by staying invested. We will never know since we tend to not hear from HFT folks benchmarking their results. HFT is more likely to hand one's head to oneself when the market turns the other way.

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Re: Capital Gains vs Business Income on stock investments

Post by adrian2 » 23 Dec 2017 13:42

Wing wrote:
23 Dec 2017 13:13
I'm not in frequent trading by any measure. I only have about 30 transactions a year with holding periods at least 1 month for each sale, less than 10 sales in the year. Only I sometimes have the habit to buy/sell securities in multiple lots to avg costs down/maximize profits. Looking into buying inverse (ie. bear) ETFs as well. So wondering if these will turn my capital gains to be treated as business income. I know "short sale" is income but not sure if gains on buying/selling bear ETF is.
You can ensure that all capital transactions on Canadian securities, even short sales, are always treated as capital gains by electing under subsection 39(4) of the Income Tax Act.
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Re: Capital Gains vs Business Income on stock investments

Post by Wing » 23 Dec 2017 20:12

adrian2 wrote:
23 Dec 2017 13:42
Wing wrote:
23 Dec 2017 13:13
I'm not in frequent trading by any measure. I only have about 30 transactions a year with holding periods at least 1 month for each sale, less than 10 sales in the year. Only I sometimes have the habit to buy/sell securities in multiple lots to avg costs down/maximize profits. Looking into buying inverse (ie. bear) ETFs as well. So wondering if these will turn my capital gains to be treated as business income. I know "short sale" is income but not sure if gains on buying/selling bear ETF is.
You can ensure that all capital transactions on Canadian securities, even short sales, are always treated as capital gains by electing under subsection 39(4) of the Income Tax Act.
I also hold US securities though.

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Re: Capital Gains vs Business Income on stock investments

Post by Wing » 23 Dec 2017 20:15

deaddog wrote:
22 Dec 2017 19:01
AltaRed wrote:
22 Dec 2017 17:18
As an aside, frequent trading can seem to be successful during bull markets, but the same investment gains may have been achieved by staying invested.
This has been my experience. Staying the course would produce the same or better returns,with a few exceptions when a specific stock falls hard and does not recover.
We will never know since we tend to not hear from HFT folks benchmarking their results. HFT is more likely to hand one's head to oneself when the market turns the other way.
HFT or day trading is probably the most risk free in a down market as the trader is in cash each night and doesn't get caught in overnight gap down moves. They sleep good at night knowing they have nothing at risk. :)

To the OP; You can elect how you want to be taxed.

The advantage of being taxed as a business is that you get to write off legitimate business expenses such as the cost of computers, subscriptions to research and of course the annual trip to traders expo in Vegas.
If treated as business income, and get to write off business expenses, can one also "incorporate" and taxed at the business tax rates? I'm always confused on this part. I see some professionals (physiotherapists, for example) setup as "self employed" but still get to be taxed at individual tax rates after deductions to all expenses. I'd assume incorporations get taxed at lower rates?

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Re: Capital Gains vs Business Income on stock investments

Post by OhGreatGuru » 23 Dec 2017 22:28

This is rather above my pay grade. But in simplistic terms you are confusing the taxes that have to be paid by a corporation with the personal taxes you have to pay if you take any money out of the corporation.

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Re: Capital Gains vs Business Income on stock investments

Post by scorpionman » 24 Dec 2017 06:38

It is quite common even for long-term investors to scale into a position and scale down a position.
They can in year 1 make many trades to build a position. Then 3 or 5 years later, they can slowly make several trades to reduce the exposure.
In my view this can mean many trades but it doesn't seem like a trading activity as there is always a core long-term position, on average, over time.
I would imagine there are many investors operating this way and would consider themselves investors. Not sure what CRA would think.

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