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Futures Trading Tax in Canada

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Introduction To Futures Trading Tax and Canada

One question that comes up often is how day trading and futures trading tax is done in Canada. I’ll give the disclaimer that my grasp on tax law is tenuous at best. The below information is a general overview of how day trading is taxes, but by no means an extensive guide. As well, I wrote this article in 2022, and rules do change. Please consult a tax accountant for your specific situations.

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Day trading tax rules in Canada are on the whole relatively okay compared to some countries. Once you have identified which of the brackets outlined below your trading activity falls into, you are required to pay taxes on your generated income by the end of the tax year (December 31st). Keep that in mind to start, end of the year, not the following April.

And like most taxes, if you pay them late, you’ll face late payment fees, fines and penalties (probably). The punchline is pay your taxes on time and avoid Johnny Canuck the Tax Man. If you decide you are above paying taxes, possibly you are pursued in the criminal courts and face up to five years in jail, as stated in the Income Tax Act or the Excise Tax Act. Again, pay the taxes and make your life far easier.

The Types Of Tax In Canada

Taxes on trading in Canada can be split into two specific categories. The first falls under the capital gains tax, the second and most applicable to day traders is in regard to business income.

Category 1: Capital Gains Taxes – Most Likely NOT You

This is worth mentioning, although most of you reading this will probably fall into the “not capital gains” category if you are like me and a scalper. See Category 2 Business Income below for how you are most likely taxed. None the less, here’s the info.

If you’re trading in the markets outside of your RRSP or RRIF, you’ll probably treat profits from your investing activities as capital gains. This comes with a definite advantage – capital gains are taxed at just 50% of your marginal tax rate.

If your intraday profits do qualify as capital gains you will need to look to schedule 3. This totals all the income sources eligible for capital gains and losses. It then takes half this amount for entry on line 127 of your federal tax return. However, any losses you incur can only be offset against other capital gains. Any other sources of income are off the cards. This also means that trading fees are not tax deductible under these rules. Bit of a let down there, but honestly for myself and probably a lot of you, you won’t fall in this category anyway.

Remember though, the capital gains tax rules are directed towards longer-term and infrequent investors. Not daily scalpers.

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Drawbacks To Capital Gain Tax Treatment

Despite the great tax rate, there are important Canadian rules around taxes to be aware of. One of which is known as the ‘superficial loss rule’, or the ’30-day rule’. This states that if an investor, a spouse, or a company they control buys back an asset or similar asset within 30-days of selling it, they cannot claim the capital loss for tax purposes. This rule trips up many traders each year, costing a considerable amount in taxes. I know that I tend to trade the exact same asset over and over, so sorry traders, probably not going to help you out.

Category 2: Business Income/Ordinary Income – Where I (and probably you) Fall

As a day trader of any sort, you look to close out any positions by the end of the trading day. “Going flat” as the cool kids say. (Actually just all traders use it, cool or not). We are looking to make profits on small price movements across a high number of trades, for you renegade scalpers like me. Even if you trade longer set ups, if you are closing positions end of day, you are a day trader. Since your primary goal is to generate profit (ie. you aren’t holding long term looking for asset appreciation, you are just churning away), you must report your earnings as business income. This income is then fully taxable at your marginal rate. Actually it’s pretty straight forward when you think about it.

Benefits

Deducting Losses – As a day trader, you cannot utilize the 50% capital gains inclusion rate on your profits. However, you can deduct 100% of your trading losses against other sources of income. So, let’s say you rack up $100,000 in trading losses this tax year (I mean, hopefully not, but let’s just pretend someone does. PS if this is you, please reconsider trading). However, you also have a consulting business (hopefully not consulting in trading since you just lost $100,000 and that’s not very good). You can offset your trading losses against the revenue generated from your consulting business. Congratulations, sucking at trading has offset your income made in consulting. All kidding aside, trading losses are offset against other business income, end of story.

Claiming Expenses – You can also claim expenses related to your trading activities. Think software costs, internet connection, your brand new trading laptop, data feed costs, etc. To be able to claim any day trader tax deductions in Canada though, you must have receipts for all the items declared on your return. The Canada Revenue Agency (CRA) will not accept these deductions without receipts, and you must also be able to justify how each purchase was related to trading activities. Data feed connection, great expense related to day trading.

Buying a YouTube premium subscription to keep you entertained while trading, not so much a direct trading expense. Expensive Herman Miller chair that you use at your day trading desk, I can justify that one (I don’t own one fyi just an example). Your living room couch though, probably not a day trading expense. Keep those receipts and be reasonable with your expenses.

Classification Requirements

I still can see the wheels turning in peoples heads, how do you get that sweet Capital Gains 50% of Marginal Tax Rate deal? Maybe you have no other business to offset losses. Maybe you have no losses, you actually make money day trading. Well, don’t worry, you most likely can’t use the Capital Gains deal above, for reasons stated. But if you really want to drive the point home, read on.

In a 1984 revised bulletin entitled ‘Transactions in Securities’, the CRA outlined the factors they will consider in deciding whether your trading activity constitutes ‘business income’.

It highlighted the following:

  • Frequency – Are you making a high number of short-term trades? Is your trading pattern similar to ‘ordinary’ day traders? If so, you will likely face business income taxes.
  • Investor knowledge – Do you have an in-depth knowledge and skill set that would suggest targeted trading instead of speculative gambling?
  • Investment – This is not just about financial investment. Do you spend a substantial amount of time studying the markets and investigating potential moves?
  • Liquid assets – Are you buying and selling popular day trading assets in high volumes? The Investment Industry Regulatory Organization of Canada defines certain popular day trading securities as those trading in excess of one hundred times a day, with a trading value of $1 million.
  • Ordinary business – Is your trading activity part of your normal business? Alternatively, is it something you do infrequently on the side?
  • Motivation – If you are a trader to earn significant profits, or to supplement your income, you will probably fall under the ‘business income’ criteria.

Although the CRA analyse each case individually, if you make a high number of trades and you own the asset for a relatively short period of time, any profits are likely to fall under the ‘business income’ taxes remit. Long story short, you aren’t getting out from falling under the business income category as a scalper.

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Forex Specific Rules

First off, I don’t trade forex so I’m going off what I’ve read, not what I’ve experienced for this. Just know there are forex specific rules for you currency globe trotting traders. Not my cup of tea, but I know forex is a lot of traders… cup of tea.

With some assets, it’s pretty clear-cut as to whether they will be treated as income or capital gains. Like oh say scalping the treasuries day in and out like myself. However, the 2010 CRA Income Tax Interpretation Bulletin makes it clear that forex trading taxes in Canada can be either business income or capital gains.

Most notable in the bulletin is:

“Where it can be determined that a gain or loss on foreign exchange arose as a direct consequence of the purchase or sale of goods abroad, or the rendering of services abroad, and such goods or services are used in the business operations of the taxpayer, such gain or loss is brought into income account. If, on the other hand, it can be determined that a gain or loss on foreign exchange arose as a direct consequence of the purchase or sale of capital assets, this gain or loss is either a capital gain or capital loss, as the case may be.”

Run with that for what it’s worth, and good luck. Go find an accountant, my brain already hurts and since I don’t trade forex, don’t enjoy taxes, and really don’t want to figure taxes out on a product I don’t trade. I’ll stick to my simple “it’s business income” rules on futures.

Preparing Your Taxes

Alright, I feel like any time you read an article on taxes, they have to include an obligatory section on some hot tips on how to prepare for taxes. Here are my tips, which are the same tips everyone gives.

  • Keep records. Keep receipts.
  • If your stuff is super complication, use tax software
  • If it’s ultra complicated, get a great tax accountant

Here’s my amazing advice – keep your statements from your broker that you probably get daily with your trading activity. Also those nice month end statements. There’s only 12 months, it’s not that hard to add up the gain/losses from your statements from 12 months, keep those receipts for that sweet Herman Miller chair and new Alienware laptop, and it’s a cake walk.

Conclusion

Look, taxes are no ones favorite thing, but honestly in Canada it’s pretty straight forward so be glad about that. If you really don’t want to deal, get a good accountant, keep your statements and receipts, call them up near year end and say “hey Mr. Accountant, get ready to earn your keep” and give them your records.

And since you probably skipped the first paragraph, just a reminder: I’m not trying to give you tax advice, just some general guidance on what to expect as a day trader in Canada. Contact the Canada Revenue Agency or an accountant with any questions related to your situation and Day Trading and Futures Tax in Canada.

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Risk Disclosure:

Futures and forex trading contains substantial risk and is not for every investor. An investor could potentially lose all or more than the initial investment. Risk capital is money that can be lost without jeopardizing ones’ financial security or life style. Only risk capital should be used for trading and only those with sufficient risk capital should consider trading. Past performance is not necessarily indicative of future results.

Hypothetical Performance Disclosure: 

Hypothetical performance results have many inherent limitations, some of which are described below. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown; in fact, there are frequently sharp differences between hypothetical performance results and the actual results subsequently achieved by any particular trading program. One of the limitations of hypothetical performance results is that they are generally prepared with the benefit of hindsight.

In addition, hypothetical trading does not involve financial risk, and no hypothetical trading record can completely account for the impact of financial risk of actual trading. for example, the ability to withstand losses or to adhere to a particular trading program in spite of trading losses are material points which can also adversely affect actual trading results. There are numerous other factors related to the markets in general or to the implementation of any specific trading program which cannot be fully accounted for in the preparation of hypothetical performance results and all which can adversely affect trading results.

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