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Are Your Gains and Losses Capital or Income?
For most taxpayers, their gains and losses from the sale
of securities are treated as capital
gains and losses. This means 50% of the gains are
taxed instead of 100%. A capital loss can only be used
to reduce or eliminate capital gains.
For some taxpayers, such as day
traders, the gains and losses are determined to be business
income, not capital. This means 100% of the gain is
taxed, and 100% of a loss is deductible. The business
loss is deductible from other income. Both the conduct and intentions of the taxpayer
are examined to determine whether to treat the securities
transactions as income or capital. The combination of
a number of the following factors may cause the gains or
losses to be treated as income (100% taxable), not capital
(50% taxable):
frequent transactions, extensive buying and selling of
securities
short periods of ownership
some knowledge of or experience in the securities
markets
security transactions form a part of the taxpayer's
ordinary business
a substantial portion of the taxpayer's time is spent
studying markets and investigating potential securities
purchases
security purchases are financed primarily with margin
or debt
the taxpayer has advertised or otherwise made it known
that he is willing to purchase securities
securities purchased are speculative in nature or do
not pay dividends
The gain or loss on the short
sale of shares is considered to be an income gain or loss.
It is possible that a taxpayer may have some securities
transactions which are capital transactions, and in the same
year have other securities transactions which are income
transactions. For example, a day trader could have two
investment accounts, one for day trading, and one for
investments which are not frequently traded, and are held as
long term investments.
A taxpayer can elect under s. 39(4) of the Income Tax Act
to have their transactions in Canadian securities to be
treated as capital transactions. The election is made
by filing form T123.
This election cannot
be made for securities owned by
a trader or dealer in securities
a non-resident
a financial institution, or
a corporation whose principal business is lending of
money or purchasing of debt obligations, or a
combination thereof
The election applies to all sales of
Canadian securities by the taxpayer in the year of the
election or future
years, and cannot be rescinded. The term
"Canadian securities" is defined in s. 39(6) of
the Income Tax Act as a security (other than a prescribed
security as described in s. 6200 of the Income Tax
Regulations) that is a share of the capital stock of a
corporation resident in Canada, a unit of a mutual fund
trust or a bond, debenture, bill, note, mortgage, hypothec
or a similar obligation issued by a person resident in
Canada. According to the CRA interpretation bulletin IT-479R,
a Canadian security includes such a security
that is sold short.
The information on this site is not intended to be a
substitute for professional advice. Each person's situation differs, and
a professional advisor can assist you in using the information on this web
site to your best advantage.
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