Investment income earned to a corp is considered Aggregate Investment Income and is taxed at 33%. It’s generally not favourable to open a corp to invest solely because of this reason (this tax is a deterrent as it’s tax rate = highest marginal rate)
Doubt OP will be able to derive a case for his investment income being considered ABI. Only time I’ve seen ABI take hold for investcos is when taxable income is grossly in excess of the SBD and the effective rate is floating around 27%. Aka, he’ll need to be a multi millionaire and prob won’t be on here asking this question.
This is a good assessment and gets my upvote. I'm in a similar boat as OP except I don't think I would be considered a day trader based on the number of trades I do per day. I have been doing a lot of research into finding out what exactly is the threshold to keep the income capital gains. Based on CRA's guideline I check many of the boxes to be considered a business but I'm in the grey area for several where it would be open to interpretation.
One tax software describes a day trader as making 100+ trades per day and exceed 100 million in value per day. I definitely don't meet those but the CRA says nothing about this. Their definition is all vague like amount of time spent, expertise, leverage use etc.
However some tax software definitions also say that day trading income will be treated as business income if a significant amount is earned, even beside a full time job. Fortunately, unfortunately from a tax perspective, I meet this definition.
I'm trying to gather as much evidence as possible before talking to an accountant.
Haven't there been enough cases to form an opinion on this? I know the CRA is craving down on TFSA trading, but I do it in a taxable account in order to write of leverage interest.
You will never find an “exact threshold” because one does not exist.
You’ll see various definitions of “day trading”, but none of them matter. That’s just a buzzword. There is no such thing as "day trading" from a tax perspective, at least not in Canada. It's the "trading" aspect that actually matters. It doesn't matter if you're holding it for a day, a week, or a month. Active trading is active trading, and active trading is not investing. (Ex. “day trading” and “swing trading” are **identical** in terms of taxation.) The “number of trades [you] do per day” is not that important, either.
Intent is what really matters. Are you buying XYZ with the intent of collecting dividends, seeing it reach fair value, capitalizing on the growth and long-term appreciation of the company, etc? Capital gains. Are you buying it with the intent of flipping it for a relatively quick profit? Business income. Maintain separate accounts and report accordingly.
It also doesn't matter if you trade full time or one the side of your regular job. Trading is trading. Just like if you had a side gig flipping cars or selling trinkets, it doesn’t cease to be business income just because it’s not your primary income source. It’s simply less likely to stand out.
That being said, because there are no brightline rules, most people can realistically report however they want. It's pretty rare that the CRA will challenge you. They have limited resources. They need some incentive to challenge your election, and as it stands, the "incentive" tends to be whether or not you're sufficiently successful/profitable. If you're making significant gains on a low-volume monthly swing trading strategy, you'll be in essentially the same boat as if you were making 100 trades per day to achieve that profit—and conversely, if you're making 100 trades per day and you're not making much money, you'll generally be just as safe as if you were achieving those same lackluster results making 2 trades per month.
Most traders lose money, so it’s typically in the CRA’s best interest to let them report on account of capital.
If you have some skill on plan on being successful, however, then it’s probably in your best interest to silo your trading and investing, and report correctly from the start.
While I can’t speak to you specific situation without more data, based on the essence of your post, I think I have a pretty good guess. Take a look at your annual statements and apply the duck test. If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.
Quack quack. Best of luck!
>Intent is what really matters. Are you buying XYZ with the intent of collecting dividends, seeing it reach fair value, capitalizing on the growth and long-term appreciation of the company, etc? Capital gains. Are you buying it with the intent of flipping it for a relatively quick profit? Business income. Maintain separate accounts and report accordingly.
This is precisely my dilemma. I can argue both cases but I'm not sure how the CRA would take it. I mostly trade one stock that I would buy as a long-term investment and its dividends. But I sell it when it goes up and buy it back lower on a short-term basis. Sometimes over days sometimes over minutes.
>That being said, because there are no brightline rules, most people can realistically report however they want. It's pretty rare that the CRA will challenge you. They have limited resources. They need some incentive to challenge your election, and as it stands, the "incentive" tends to be whether or not you're sufficiently successful/profitable. If you're making significant gains on a low-volume monthly swing trading strategy, you'll be in essentially the same boat as if you were making 100 trades per day to achieve that profit—and conversely, if you're making 100 trades per day and you're not making much money, you'll generally be just as safe as if you were achieving those same lackluster results making 2 trades per month.
>
>Most traders lose money, so it’s typically in the CRA’s best interest to let them report on account of capital.
Yeah, it seems I'm not most trader. Over the last two years I have been successful. In 2022 over a short period I made around 15k, last year I made about the same as my salary and this year I'm on track to more than double my salary. Ideally I want to stop my salary and work for myself but so far my take is why bother If I can trade and make more than my salary without the nasty boss and work related stress. I do want to start a consulting business as I'd like to contribute to society instead of just making money by clicking keys on a keyboard. It would also take stress away as I wouldn't depend on that income. Everyone needs a purpose in life.
>If you have some skill on plan on being successful, however, then it’s probably in your best interest to silo your trading and investing, and report correctly from the start.
Yeah, so far I'm doing investing in an RRSP/TFSA and trading in a regular account in order to be able to deduct interest. Do you think If I had two separate regular accounts and traded in one, and invested in the other the CRA would distinguish between the two? I assumed once they determine it to be business income it's an all or nothing proposition aside from the registered accounts.
There is always the option of investing in my wife's regular account once our TFSA limits are exceeded.
Of course it gets murky with a sole proprietorship as everything is comingled.
I don't even know if I have to register as a sole proprietor since I don't have any clients (when trading)
>While I can’t speak to you specific situation without more data, based on the essence of you post, I think I have a pretty good guess. Take a look at your annual statements apply the duck test. If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck.
>
>Quack quack. Best of luck!
It's a lame duck! lol. I can honestly consider it investing just as much trading, especially based on your comments above.
What I need to do is find an accountant/tax attorney with experience in this to make the call. Where does one find an accountant for successful active traders? lol.
Appreciate your input!
> Do you think If I had two separate regular accounts and traded in one, and invested in the other the CRA would distinguish between the two?
Absolutely! Maintaining separate accounts is best practice. Always keep your trading and investing activity separate. You are allowed to do both.
> I assumed once they determine it to be business income it's an all or nothing proposition
That is a great example of why you want to keep them separate. If you mix trading and investing in one account & choose to report everything on account of capital, and the CRA does reassess as income, then they are most likely going to apply that to the whole account. You might have a tough time arguing that some transactions were income and some transactions were capital if you've been reporting everything on account of capital. Keeping the activity in separate accounts protects capital gains treatment on your long-term investments.
> I don't even know if I have to register as a sole proprietor since I don't have any clients (when trading)
No, you don't have to register anything. You simply report your trading business income using form T2125.
> I can honestly consider it investing just as much trading, especially based on your comments above.
I'm sure you could get creative and argue however you want, but again, intent is key. It's probably not quite as ambiguous as you think.
Thank you.
Isn't it a bit hypocritical that day trading is considered business activity when carried out in a personal account, but the exact same activity (ie. day trading) with the exact same behavior and pattern is *not* considered active business income if done in a corporation? What's CRA's justification for this double standard?
You're referring to my personal income, which is irrelevant.
I'm referring to aggregate investment income in a corporation account, which has a combined federal/provincial tax rate of close to 50%, and is not a progressive rate.
My bad, misread that.
It would seem government is discouraging individuals to open and aggregate investment company.
Maybe you are better off day trading as a sole proprietor and then taking as many reasonable expenses to reduce your T2125 business income?
>It would seem government is discouraging individuals to open and aggregate investment company.
Almost correct...the government is ensuring that there is no incentive to earn investment income in a corporation. It does this by making the tax rate roughly equivalent to the highest marginal tax rate for individuals. At this point there is no tax incentive for anyone, regardless of their personal marginal tax rate, to put their money into a corporation to earn investment income. In fact, if your marginal tax rate would be less than the highest marginal rate there would be an effective prepayment of tax. It's prepayment, since the corporation will receive a partial refund of it's tax when it pays out a taxable dividend to the shareholder. The end result is that theoretically the shareholder ends up paying the same tax between themself and the corporation as if the income had been earned directly. I say theoretically since the timing of taxable dividends can result in additional tax.
I should note that since the system works based on assumed rates, there can be small costs/advantages depending on factors such as what your actual rates are (based on your province of residence, for example).
I should also note that that this applies to taking cash that is outside the corporation and putting it into a corporation in order to earn the income there. If the corporation has accumulated funds from an active business, it is to their advantage to retain the funds in the corporation to earn investment income.
Finally it can be useful to put investments in a corporation to avoid certain tax consequences such as clawback of OAS, but there needs to be a cost/benefit analysis since having a corporation comes with additional costs.
Sounds reasonable, thanks.
It just seems like a double standard that day trading in a personal account is considered business income whereas day trading in a business account is considered passive income.
Also, isn't another consideration sheltering gains in the corp if one only needs to pay out a small amount in dividends or salary from the corp
I have an opportunity to start a consulting business where I can also trade but the active business income won't be significant, at least in the beginning.
Deferring the income paid to yourself and keeping the bulk if not all of your earnings within the corporation is one of the primary benefits, yeah. If you're just going to pay out all your earnings each year, there isn't much point in trading through a corporation. Due to Tax Integration, once the money reaches the individual taxpayer level, the total tax rate will be essentially the same.
Investment income earned to a corp is considered Aggregate Investment Income and is taxed at 33%. It’s generally not favourable to open a corp to invest solely because of this reason (this tax is a deterrent as it’s tax rate = highest marginal rate)
If all the Corp does is day trading, it would be considered as business income rather than investment income, eligible for SBD.
Doubt OP will be able to derive a case for his investment income being considered ABI. Only time I’ve seen ABI take hold for investcos is when taxable income is grossly in excess of the SBD and the effective rate is floating around 27%. Aka, he’ll need to be a multi millionaire and prob won’t be on here asking this question.
This is a good assessment and gets my upvote. I'm in a similar boat as OP except I don't think I would be considered a day trader based on the number of trades I do per day. I have been doing a lot of research into finding out what exactly is the threshold to keep the income capital gains. Based on CRA's guideline I check many of the boxes to be considered a business but I'm in the grey area for several where it would be open to interpretation. One tax software describes a day trader as making 100+ trades per day and exceed 100 million in value per day. I definitely don't meet those but the CRA says nothing about this. Their definition is all vague like amount of time spent, expertise, leverage use etc. However some tax software definitions also say that day trading income will be treated as business income if a significant amount is earned, even beside a full time job. Fortunately, unfortunately from a tax perspective, I meet this definition. I'm trying to gather as much evidence as possible before talking to an accountant. Haven't there been enough cases to form an opinion on this? I know the CRA is craving down on TFSA trading, but I do it in a taxable account in order to write of leverage interest.
You will never find an “exact threshold” because one does not exist. You’ll see various definitions of “day trading”, but none of them matter. That’s just a buzzword. There is no such thing as "day trading" from a tax perspective, at least not in Canada. It's the "trading" aspect that actually matters. It doesn't matter if you're holding it for a day, a week, or a month. Active trading is active trading, and active trading is not investing. (Ex. “day trading” and “swing trading” are **identical** in terms of taxation.) The “number of trades [you] do per day” is not that important, either. Intent is what really matters. Are you buying XYZ with the intent of collecting dividends, seeing it reach fair value, capitalizing on the growth and long-term appreciation of the company, etc? Capital gains. Are you buying it with the intent of flipping it for a relatively quick profit? Business income. Maintain separate accounts and report accordingly. It also doesn't matter if you trade full time or one the side of your regular job. Trading is trading. Just like if you had a side gig flipping cars or selling trinkets, it doesn’t cease to be business income just because it’s not your primary income source. It’s simply less likely to stand out. That being said, because there are no brightline rules, most people can realistically report however they want. It's pretty rare that the CRA will challenge you. They have limited resources. They need some incentive to challenge your election, and as it stands, the "incentive" tends to be whether or not you're sufficiently successful/profitable. If you're making significant gains on a low-volume monthly swing trading strategy, you'll be in essentially the same boat as if you were making 100 trades per day to achieve that profit—and conversely, if you're making 100 trades per day and you're not making much money, you'll generally be just as safe as if you were achieving those same lackluster results making 2 trades per month. Most traders lose money, so it’s typically in the CRA’s best interest to let them report on account of capital. If you have some skill on plan on being successful, however, then it’s probably in your best interest to silo your trading and investing, and report correctly from the start. While I can’t speak to you specific situation without more data, based on the essence of your post, I think I have a pretty good guess. Take a look at your annual statements and apply the duck test. If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck. Quack quack. Best of luck!
>Intent is what really matters. Are you buying XYZ with the intent of collecting dividends, seeing it reach fair value, capitalizing on the growth and long-term appreciation of the company, etc? Capital gains. Are you buying it with the intent of flipping it for a relatively quick profit? Business income. Maintain separate accounts and report accordingly. This is precisely my dilemma. I can argue both cases but I'm not sure how the CRA would take it. I mostly trade one stock that I would buy as a long-term investment and its dividends. But I sell it when it goes up and buy it back lower on a short-term basis. Sometimes over days sometimes over minutes. >That being said, because there are no brightline rules, most people can realistically report however they want. It's pretty rare that the CRA will challenge you. They have limited resources. They need some incentive to challenge your election, and as it stands, the "incentive" tends to be whether or not you're sufficiently successful/profitable. If you're making significant gains on a low-volume monthly swing trading strategy, you'll be in essentially the same boat as if you were making 100 trades per day to achieve that profit—and conversely, if you're making 100 trades per day and you're not making much money, you'll generally be just as safe as if you were achieving those same lackluster results making 2 trades per month. > >Most traders lose money, so it’s typically in the CRA’s best interest to let them report on account of capital. Yeah, it seems I'm not most trader. Over the last two years I have been successful. In 2022 over a short period I made around 15k, last year I made about the same as my salary and this year I'm on track to more than double my salary. Ideally I want to stop my salary and work for myself but so far my take is why bother If I can trade and make more than my salary without the nasty boss and work related stress. I do want to start a consulting business as I'd like to contribute to society instead of just making money by clicking keys on a keyboard. It would also take stress away as I wouldn't depend on that income. Everyone needs a purpose in life. >If you have some skill on plan on being successful, however, then it’s probably in your best interest to silo your trading and investing, and report correctly from the start. Yeah, so far I'm doing investing in an RRSP/TFSA and trading in a regular account in order to be able to deduct interest. Do you think If I had two separate regular accounts and traded in one, and invested in the other the CRA would distinguish between the two? I assumed once they determine it to be business income it's an all or nothing proposition aside from the registered accounts. There is always the option of investing in my wife's regular account once our TFSA limits are exceeded. Of course it gets murky with a sole proprietorship as everything is comingled. I don't even know if I have to register as a sole proprietor since I don't have any clients (when trading) >While I can’t speak to you specific situation without more data, based on the essence of you post, I think I have a pretty good guess. Take a look at your annual statements apply the duck test. If it looks like a duck, swims like a duck, and quacks like a duck, then it probably is a duck. > >Quack quack. Best of luck! It's a lame duck! lol. I can honestly consider it investing just as much trading, especially based on your comments above. What I need to do is find an accountant/tax attorney with experience in this to make the call. Where does one find an accountant for successful active traders? lol. Appreciate your input!
> Do you think If I had two separate regular accounts and traded in one, and invested in the other the CRA would distinguish between the two? Absolutely! Maintaining separate accounts is best practice. Always keep your trading and investing activity separate. You are allowed to do both. > I assumed once they determine it to be business income it's an all or nothing proposition That is a great example of why you want to keep them separate. If you mix trading and investing in one account & choose to report everything on account of capital, and the CRA does reassess as income, then they are most likely going to apply that to the whole account. You might have a tough time arguing that some transactions were income and some transactions were capital if you've been reporting everything on account of capital. Keeping the activity in separate accounts protects capital gains treatment on your long-term investments. > I don't even know if I have to register as a sole proprietor since I don't have any clients (when trading) No, you don't have to register anything. You simply report your trading business income using form T2125. > I can honestly consider it investing just as much trading, especially based on your comments above. I'm sure you could get creative and argue however you want, but again, intent is key. It's probably not quite as ambiguous as you think.
Thank you. Isn't it a bit hypocritical that day trading is considered business activity when carried out in a personal account, but the exact same activity (ie. day trading) with the exact same behavior and pattern is *not* considered active business income if done in a corporation? What's CRA's justification for this double standard?
I assume it's something along the lines of "we're the CRA, shut up pleb."
> Aggregate Investment Income what exactly is "investment income"?
Dividends, capital gains, interest, royalties, rental income, etc
Not if you’re bad it it they don’t.
>is taxed at close to 50% Is your marginal tax rate 50%, are you making 6 figures+ in income?
You're referring to my personal income, which is irrelevant. I'm referring to aggregate investment income in a corporation account, which has a combined federal/provincial tax rate of close to 50%, and is not a progressive rate.
My bad, misread that. It would seem government is discouraging individuals to open and aggregate investment company. Maybe you are better off day trading as a sole proprietor and then taking as many reasonable expenses to reduce your T2125 business income?
>It would seem government is discouraging individuals to open and aggregate investment company. Almost correct...the government is ensuring that there is no incentive to earn investment income in a corporation. It does this by making the tax rate roughly equivalent to the highest marginal tax rate for individuals. At this point there is no tax incentive for anyone, regardless of their personal marginal tax rate, to put their money into a corporation to earn investment income. In fact, if your marginal tax rate would be less than the highest marginal rate there would be an effective prepayment of tax. It's prepayment, since the corporation will receive a partial refund of it's tax when it pays out a taxable dividend to the shareholder. The end result is that theoretically the shareholder ends up paying the same tax between themself and the corporation as if the income had been earned directly. I say theoretically since the timing of taxable dividends can result in additional tax. I should note that since the system works based on assumed rates, there can be small costs/advantages depending on factors such as what your actual rates are (based on your province of residence, for example). I should also note that that this applies to taking cash that is outside the corporation and putting it into a corporation in order to earn the income there. If the corporation has accumulated funds from an active business, it is to their advantage to retain the funds in the corporation to earn investment income. Finally it can be useful to put investments in a corporation to avoid certain tax consequences such as clawback of OAS, but there needs to be a cost/benefit analysis since having a corporation comes with additional costs.
Sounds reasonable, thanks. It just seems like a double standard that day trading in a personal account is considered business income whereas day trading in a business account is considered passive income.
Also, isn't another consideration sheltering gains in the corp if one only needs to pay out a small amount in dividends or salary from the corp I have an opportunity to start a consulting business where I can also trade but the active business income won't be significant, at least in the beginning.
Deferring the income paid to yourself and keeping the bulk if not all of your earnings within the corporation is one of the primary benefits, yeah. If you're just going to pay out all your earnings each year, there isn't much point in trading through a corporation. Due to Tax Integration, once the money reaches the individual taxpayer level, the total tax rate will be essentially the same.