Stocks, Bonds etc. -> Investing Tax Issues -> Are gains and losses capital or income?
Are Your Investment 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, and if the loss exceeds other income it becomes a non-capital loss. 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, 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.
For RRSPs and RRIFs, s. 146(4)(b) and 146.3(3)(e) specifically exclude from business income any business income from qualified investments, or from the disposition of qualified investments. This means that someone could engage in day-trading in their RRSP or RRIF without being taxable on the business income until the income is withdrawn. This exclusion does not apply to other registered accounts, such as Tax-Free Savings Accounts. See link below to Folio S3-F10-C1.
Excellent article on whether stock transactions are capital or income: Vern Krishna: Stock Traders Beware of Tax Traps: The Taxman Cometh
This topic is discussed in the April 2021 Life in the Tax Lane video from Video Tax News.
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 Election on Disposition of Canadian Securities, and applies for Quebec taxation purposes also (as per Quebec Taxation Act s. 250.1). 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 (link below), a Canadian security includes such a security that is sold short.
TaxTips.ca Resources
Qualified Investments for an RRSP, RRIF, RESP, RDSP or TFSA
Trade Date or Settlement Date - When are Gains or Losses Recorded?
Canada Revenue Agency (CRA) and Revenue Quebec Resources
CRA IT-479R Transactions in Securities (Archived) - see paragraphs 11 to 13 re some of the factors to be considered in ascertaining whether the taxpayer is carrying on a business.Income Tax Folio S3-F10-C1 - Types of qualified investments
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 (Archived)
Tax Tip: If you're not sure, get advice from a tax professional!
Revised: October 15, 2021