Trading in Shares: Income or Capital?
Are you earning income or capital gains by your trading activity?
A prominent issue encountered by Canadian taxpayers is whether the gains from the sale of shares are income or capital gains. If income, it is taxed just like any other income. But capital gains are taxed differently, with only half of the gain included in computing taxable income. Of course, it is advantageous to earn capital gains, and to have any losses on account of income (which can then be used to reduce income for tax purposes).
In general terms, the test for determining whether securities transactions constitute a business is whether the taxpayer is engaged in a scheme for profit-making or whether there is merely an enhancement of value: Irrigation Industries Ltd. v. M.N.R., 62 DTC 1131 (SCC); Hawa v. The Queen, 2006 TCC 612, 2007 DTC 28. 1338664 Ontario Limited v. The Queen, 2008 TCC 350
The Court have developed a test to determine when trading in securities will be on account of capital or income. Please see the
Rachgot Decision. The factors considered are:
a) Frequency of the Transactions
b) The Duration of the Holdings
c) The Nature and Quantity of the Securities Held
d) The Time Spent on the Activity
f) Particular Knowledge He Possessed
A taxpayer who trades regularly, holds shares for short periods, spends quite a bit of time trading and treats it like a business could be engaged in a business. A taxpayer who holds investments long-term, holds blue chip securities and spends little time trading is likely holding investments, and earnings would be capital gains.
For a recent case we were involved with, please see Foote v. HMQ
Please call the lawyers of Ummat Tax Law if CRA has characterized your earnings from the purchase and sale of shares incorrectly. (905) 336-8924.