DAVID WILKENFELD, CPA, CA, canadian tax CONSULTANT

What’s Your Tax Issue?: Income or Capital Gains?

In Canadian Income Tax on October 12, 2009 at 4:55 pm

The Tax Issue:

I recently sold my business and started trading commodities as a full-time occupation. Can I report my gains from these transactions as capital gains?

The Answer:

This is one of the more contentious tax issues that arise on a daily basis. The gains from the sale of any property is either fully taxable on income account or a capital gain (50% taxable). The determination is not always easy. A capital gain arises on the sale of capital property, which is generally thought of as a long-term asset that is held for investment purposes, such as shares of public corporations.

Trading in commodities as a full-time career suggests to me that you are not purchasing commodities for investment purposes, Rather, your intention is to buy and sell frequently, earning your profit on short-term price differentials. This would indicate that your profits will be seen by the CRA as being on income account.

A more difficult question would arise if your activities included the purchase and sale of public company shares. Here, there is often an argument to be made that shares may be held for investment purposes, and the line may not be so clear. The courts and the CRA have established certain guidelines to help in making the determination. Some of the factors that may indicate that you are carrying on a business (and must report gains as income) are:

  • Frequency of transactions – a history of extensive buying and selling
  • Period of ownership – securities are owned for a relatively short period of time
  • Knowledge of the markets
  • Time spent – a substantial amount of time is spent studying the markets
  • Financing – transactions are financed on margin or some other form of debt

For Canadian taxpayers who are not dealers, or in the business of trading, a special election is available that would ensure that gains on the sale of Canadian securities are always treated as being on account of capital. The downside is that losses will also be treated as capital losses The election is once-and-for-all, and cannot be revoked in the future.

The CRA has published IT-479R, which goes into this topic in greater detail, for those that are interested in this topic.

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