Canadian Tax and
Financial Information
Capital or Income?

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Stocks, Bonds etc. -> Investing Tax Issues -> Are gains and losses capital or income?

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):

bullet frequent transactions, extensive buying and selling of securities
bullet short periods of ownership
bullet some knowledge of or experience in the securities markets
bullet security transactions form a part of the taxpayer's ordinary business
bullet a substantial portion of the taxpayer's time is spent studying markets and investigating potential securities purchases
bullet security purchases are financed primarily with margin or debt
bullet the taxpayer has advertised or otherwise made it known that he is willing to purchase securities
bullet 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, unless an election has been made under s. 39(4) to treat them as capital transactions.  In Federal Court of Appeal Rezek v. Canada (2005 FCA 227), it is stated that any broker's fees, rental fees and compensatory dividends paid by the short seller between the short sale and the close out will reduce the profit or increase the 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.

Form T123:  Election to Treat Transactions as Capital Transactions

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, and applies for Quebec taxation purposes also (as per Quebec Taxation Act s. 250.1).  This election cannot be made for securities owned by

bullet a trader or dealer in securities
bullet a non-resident
bullet a financial institution, or
bullet 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.

Resources re Determining Capital vs Income:

CRA IT-479R Transactions in Securities

Revenue Quebec IMP. 250.1-1/R2 Election in respect of the disposition of Canadian securities (pdf)

IT-459 Adventure or Concern in the Nature of Trade


Revised: April 21, 2016


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