How should I report my online trading income?

April 14, 2022

If you’re into online trading and watching the market everyday, you’re part of a growing number of Canadians who are managing their own investments. Online trading is a great way to build up your investment portfolio and generate some extra income, but you might be wondering if you should be reporting your transactions as business income or as capital gains or losses.

Generally, if you’re purchasing Canadian securities (such as stocks) as an investment, you should report the transactions as capital gains or losses. On the other hand, if you’re buying and selling regularly to make a profit, your transactions should be reported as business income. For example, day-traders, who make all their trading transactions within the same day, should report transactions as business income.

How to decide? Determine your pattern of trading.

Factors that determine a trading pattern include:

  • The frequency of your transactions;
  • The duration of your holdings (the usual length of time between when you buy and sell your stocks);
  • Your knowledge and experience of the stock market; and
  • How much time you spend on the activity.

The type of securities you buy is also important. For example, let’s say you focus mostly on blue chip stocks (stocks that are considered safe and reliable, because they do well even when the economy isn’t great). These can produce dividends, and that might indicate you’re purchasing them as an investment. If you invest more into penny stocks (inexpensive stocks that are risky because they don’t guarantee a profit), those transactions would probably be considered business income.

One or more of these factors on their own won’t necessarily determine how you should report your trading income. For example, the fact that you have a high volume of trades won’t mean you’re in business if your long-term intention is to build up your investment portfolio. On the other hand, a single transaction could be considered business income, especially if it was made in hopes of a quick profit. Collectively, however, this reveals a pattern of activity that’s consistent with either an investment or business intention.

What’s the difference?

From a tax perspective, here’s the difference between reporting your transactions as capital gains or as business income:

  • If you report your profits as capital gains, they’re only 50% taxable.
  • If you report your profits as business income, they’re fully taxable.
  • Capital losses can only be claimed against capital gains to lower the taxable amount.
    • Business losses, on the other hand, are fully deductible against other sources of income.
  • Business profits are pensionable for CPP/QPP purposes, meaning they might be subject to CPP contributions at the self-employed rate of 10.5%, and QPP contributions at the self-employed rate of 10.8% (if you’re a resident of Québec).

Can I guarantee my trading income will be treated as capital gains?

You can choose to guarantee that the sale or transfer of your stocks will be treated as capital gains (or losses). To do this, you’ll need to include the Election on disposition of Canadian securities (T123) form when you file your return the same year you sell or transfer those stocks.

This election only applies to Canadian securities. For example, you can’t make this election on stocks from the United States.

Keep in mind, this is a permanent decision, meaning all your Canadian securities (including mutual funds, bonds, mortgages, and more) will be treated as capital gains or losses going forward. Find an H&R Block office near you to ask a Tax Expert if this election is right for you.

What else should I know before I decide?

When taking a look through your trades, remember that the CRA and Revenu Québec usually consider the gain or loss on short sales (when you sell an investment, but not because you think its value will go down) to be business income unless you made the transaction to improve the value of identical shares you’re holding as a long-term investment.

The government can also audit Tax Free Savings Accounts (TFSA) that they think might be used as shelters for trading transactions. When they’re satisfied that the account is used to generate business income, they’ll assess tax on the financial institution that the account is registered to. This isn’t an issue with Registered Retirement Savings Plans (RRSPs), since any income generated within those plans is taxed on withdrawal, regardless of whether it’s business or investment income.

If your return is selected for review and you purchased H&R Block’s Peace of Mind® Extended Service Plan, or if you added Audit Protection to our Do It Yourself Tax Software, you’ll have one of our Tax Experts by your side from the moment you receive a CRA or Revenu Québec assessment, helping you through the entire process.

Have more questions about declaring your online trading income on your return? Get help from the largest network of reliable Tax Experts by choosing one of four convenient ways to file: File in an Office, Drop-off at an Office, Remote Tax Expert, or Do It Yourself Tax Software.

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