Taxes in Canada

[ixero@20 134]

@Kim and other Canadian members, can you please share your experience how trades we are doing using SO strategies should be reported to CRA? Are they income or capital gains? 

My accountant didn't have much experience with active options trading and said she would need to get back to me. I also read IT479 CRA publication myself and while I will need to read it again, I am now leaning towards it should be reported as income. But I still need to wait for my accountant to do her research or try to find another one who has more experience with options.

I am not asking for a legal advise, but merely looking to hear your opinion and experience. If anyone can share it, it will be greatly appreciated.

 

[Kim 7,943]

You buy options and then sell them, how is it different from buying and selling stocks?

IB has tax reports, one of them is T5008 where:

Line 20: Cost or book value

Line 21: Proceeds of disposition or settlement amount

It is reported as (21-20)*50%.

The only case you would need to report it as income if this is your full time job and main source of income.

[Paul 328]

You might want to double check with your accountant.  I'm pretty sure I claim all as income because of the short holding period.  My old returns are in storage in BC, so I can't access them right now and say so with certainty.

 

[Kim 7,943]

But there T5008 doesn't mention short or long term holding period - there is only one line for the cost and proceeds, so not sure how CRA would even know. IB have also the T5 form which is for income.

[ramn 3]

Just add T5008 to the tax reporting tool you are using it would treat it as capital gains automatically..

 

I have a different question here. Anyone writing off SO subscription fee against the gain/income? Like under professional investment advice or something else?

[kyrojin 4]

43 minutes ago, Paul said:

You might want to double check with your accountant.  I'm pretty sure I claim all as income because of the short holding period.  My old returns are in storage in BC, so I can't access them right now and say so with certainty.

 

This is also what I have been advised. Regarding how CRA would know, they probably would not know until you are audited. As with all of our tax returns, it is based on self assessment. 
 

If you are ever audited and found due to the short nature of the holdings, you may be reassessed for your taxes. 
 

On the topic of why you would report as income, while definitely not as advantageous of paying only on 50% of the gains, by reporting as income, you may write off items such as courses and tools that you use to earn the business income. 
 

I would strongly advise speaking with your accountant on your situation. 

[Kim 7,943]

I read publication IT479, and I didn't see any mention of short or long holding period. Also, if there is no mentioning of it in T5008, why options should be be treated differently from stocks? T5008 mentions "Securities", it does not have separate lines for stocks and options.

When I said how CRA would know, I meant how would they distinguish between stocks and options if T5008 doesn't?

[kyrojin 4]

3 minutes ago, Kim said:

I read publication IT479, and I didn't see any mention of short or long holding period. Also, if there is no mentioning of it in T5008, why options should be be treated differently from stocks? T5008 mentions "Securities", it does not have separate lines for stocks and options.

When I said how CRA would know, I meant how would they distinguish between stocks and options if T5008 doesn't?

Each T5008 will state what type of security it is in line 15. The type code listed in line 15 will differentiate between securities such as futures, options, shares etc.

https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/completing-slips-summaries/financial-slips-summaries/return-securities-transactions-t5008/t5008-slip/completing-t5008-slip/detailed-instructions/box-15-type-code-securities.html

Furthermore, during the audit you may be asked to produce the trades and securities that amounted to the values listed in lines 20 and 21. This will reveal the duration of your holdings.

[Kim 7,943]

Here is a publication I found - https://www.taxtips.ca/personaltax/investing/taxtreatment/options.htm

"For most people, the gains and losses from call and put options are taxed as capital gains (on capital account)."

And another one - https://ca.rbcwealthmanagement.com/documents/29328/29356/Taxation_of_options_transactions_04132018_high.pdf/c632c8ea-0e32-4e55-9c5d-f8475c09fa75

"the proceeds from every security you sell in that year and all subsequent years will be treated as a capital gain or loss"

[Kim 7,943]

2 minutes ago, kyrojin said:

Each T5008 will state what type of security it is in line 15. The type code listed in line 15 will differentiate between securities such as futures, options, shares etc.

https://www.canada.ca/en/revenue-agency/services/tax/businesses/topics/completing-slips-summaries/financial-slips-summaries/return-securities-transactions-t5008/t5008-slip/completing-t5008-slip/detailed-instructions/box-15-type-code-securities.html

Furthermore, during the audit you may be asked to produce the trades and securities that amounted to the values listed in lines 20 and 21. This will reveal the duration of your holdings.

Correct. In our case, OPC (Option contracts). But it doesn't distinguish between short term and long term contracts. I didn't find any mentioning anywhere that options are treated differently from stocks for the purpose of taxes reporting.  

[kyrojin 4]

5 minutes ago, Kim said:

Here is a publication I found - https://www.taxtips.ca/personaltax/investing/taxtreatment/options.htm

"For most people, the gains and losses from call and put options are taxed as capital gains (on capital account)."

And another one - https://ca.rbcwealthmanagement.com/documents/29328/29356/Taxation_of_options_transactions_04132018_high.pdf/c632c8ea-0e32-4e55-9c5d-f8475c09fa75

"the proceeds from every security you sell in that year and all subsequent years will be treated as a capital gain or loss"

Correct about most people the gains and losses will be taxes as capital gains. However, further down in the same page, you there is an additional link where there is a guideline which tries to assist you in determining if your activities are to be treated as capital gains or business income.

 

Quote

However, if you are in the business of buying and selling stock, then your gains and losses from options will be treated as income (on income account - see capital or income).

In the linked page, the list of guidelines to determine treatment of income is as follows:

Quote

	frequent transactions, extensive buying and selling of securities
	short periods of ownership
	some knowledge of or experience in the securities markets
	security transactions form a part of the taxpayer's ordinary business
	a substantial portion of the taxpayer's time is spent studying markets and investigating potential securities purchases
	security purchases are financed primarily with margin or debt
	the taxpayer has advertised or otherwise made it known that he is willing to purchase securities
	securities purchased are speculative in nature or do not pay dividends

On the same page, you may submit Form T123 to elect all transactions as capital gains in the future. From my understanding, this is irreversible and only applicable to Canadian securities.

Quote

The election applies to all sales of Canadian securities by the taxpayer in the year of the election or future years, and cannot be rescinded.  The term "Canadian securities" is defined in s. 39(6) of the Income Tax Act as a security (other than a prescribed security as described in s. 6200 of the Income Tax Regulations) that is a share of the capital stock of a corporation resident in Canada, a unit of a mutual fund trust or a bond, debenture, bill, note, mortgage, hypothec or a similar obligation issued by a person resident in Canada.  According to the CRA interpretation bulletin IT-479R (link below), a Canadian security includes such a security that is sold short.

7 minutes ago, Kim said:

Correct. In our case, OPC (Option contracts). But it doesn't distinguish between short term and long term contracts. I didn't find any mentioning anywhere that options are treated differently from stocks for the purpose of taxes reporting.  

Correct, the T5008 does not distinguish this, again this is self reporting. I believe you will be in the best position to determine if your contracts are of short or long term contracts. If an audit takes place, you may be asked to defend your position.

 

[kyrojin 4]

17 minutes ago, Kim said:

And another one - https://ca.rbcwealthmanagement.com/documents/29328/29356/Taxation_of_options_transactions_04132018_high.pdf/c632c8ea-0e32-4e55-9c5d-f8475c09fa75

"the proceeds from every security you sell in that year and all subsequent years will be treated as a capital gain or loss"

Regarding the quote provided here. This is referring to the same election of form T123 which I mentioned above. Sorry, I had not read the whole PDF prior to my previous reply. In this PDF, you will note the same message as the taxtips.ca web pages.

From page 2 of the PDF:

Quote

What are the tax consequencesof option transactions?

In order to determine the tax consequences of an option transaction, you need to establish whether the transaction is considered on account of income (business income or loss) or capital (capital gain or loss). This determination depends on your specific circumstances and the nature of the transaction.

From page 3 of the PDF:

Quote

Are gains and losses on account of income or capital?

Although there is no definitive rule to determine if a particular transaction is on account of income or capital, the Canada Revenue Agency (CRA) has provided some guidance in their Interpretation Bulletin IT-479R. The CRA has stated that the proceeds of sale will normally be considered to be on income account (income from business) where the person is a “trader or dealer in securities”. A trader or dealer in securities is generally a person who makes it a profession or a business of buying and selling securities. Some factors that are considered when determining whether a person is a trader or dealer in securities are: the frequency of the transactions, the period of the holdings, the knowledge of the securities market, the time spent studying the securities market and investigating potential purchase, and the intention to acquire for resale at a profit.

In the following paragraph in page 3 of the PDF:

Quote

Subject to certain exceptions, if you are not considered a trader or dealer in securities, you may make an irrevocable election in your income tax return that deems all Canadian securities you own in that year and in any subsequent year be treated as capital property. This means that the proceeds from every security you sell in that year and all subsequent years will be treated as a capital gain or loss. The election is made by filing form T123 – Election on disposition of Canadian securities. For any such election made after December 19, 2006, Quebec residents are also required to notify Revenu Quebec in writing about the election and include a copy of any document that was filed with CRA in respect to that election.

Again, the PDF refers to the election and that it is only for the proceeds on the disposition of Canadian securities.

Lastly, the final paragraph of page 3 in the PDF:

Quote

As the determination of the tax treatment can be subject to interpre tation, it is always recom men ded that you seek professional tax advice whenever you realize gains or losses on option transactions. Using a consistent approach year over year will help reduce the risk of a challenge by the CRA.

I would advise OP to do the same.

[Kim 7,943]

My point is that the reporting (income or capital gains) is determined by the personal situation of the taxpayer. The key sentence is "The CRA has stated that the proceeds of sale will normally be considered to be on income account (income from business) where the person is a “trader or dealer in securities”. If the taxpayer is considered a trader or a dealer, then it's income, no matter if it's stocks or options. Otherwise it's capital gains. All securities (options, futures, stocks, commodities etc) are treated the same for that matter.

[kyrojin 4]

1 minute ago, Kim said:

My point is that the reporting (income or capital gains) is determined by the personal situation of the taxpayer. The key sentence is "The CRA has stated that the proceeds of sale will normally be considered to be on income account (income from business) where the person is a “trader or dealer in securities”. If the taxpayer is considered a trader or a dealer, then it's income, no matter if it's stocks or options. Otherwise it's capital gains. All securities (options, futures, stocks, commodities etc) are treated the same for that matter.

I don't disagree with you. I am providing the advice I was given on how one is to be determined if they are considered a trader or dealer in securities. For most of us, we will unlikely to be a dealer. But under certain guidelines, we may be considered a trader. Once you are considered a trader, all income is considered income and not capital gains.

Your comment here made me go back and re-read the original question.

2 hours ago, ixero@20 said:

@Kim and other Canadian members, can you please share your experience how trades we are doing using SO strategies should be reported to CRA? Are they income or capital gains? 

My accountant didn't have much experience with active options trading and said she would need to get back to me. I also read IT479 CRA publication myself and while I will need to read it again, I am now leaning towards it should be reported as income. But I still need to wait for my accountant to do her research or try to find another one who has more experience with options.

I am not asking for a legal advise, but merely looking to hear your opinion and experience. If anyone can share it, it will be greatly appreciated.

 

Here, @ixero@20, is asking how the strategies are to be reported to CRA. In this regard, @Kim, you are absolutely correct, the strategies themselves do not matter. It is whether or not the tax payer is considered a trader or not which will determine if the reported income should be capital gains or income from business.

2 hours ago, Kim said:

I'm reporting it as capital gains. Why would you report it as income? You buy options and then sell them, how is it different from buying and selling stocks?

Also, IB has tax reports, one of them is T5008 where:

Line 20: Cost or book value

Line 21: Proceeds of disposition or settlement amount

My account reports (21-20)*50%

Here @Kim, your original response is what prompted my desire to provide the advice I was given previously. In this original response, there was no additional comments or information on the determination of whether the tax payer is a trader or not. I believe we are on the same page and we have highlighted some of the details that goes into ones tax return. As always, tax is a complex subject and should be consulted with a tax professional.

[Paul 328]

1 hour ago, kyrojin said:

This is also what I have been advised. Regarding how CRA would know, they probably would not know until you are audited. As with all of our tax returns, it is based on self assessment. 
 

If you are ever audited and found due to the short nature of the holdings, you may be reassessed for your taxes. 
 

On the topic of why you would report as income, while definitely not as advantageous of paying only on 50% of the gains, by reporting as income, you may write off items such as courses and tools that you use to earn the business income. 
 

I would strongly advise speaking with your accountant on your situation. 

If perhaps I could have claimed capital gains then maybe I am owed money.  I'm pretty sure whatever I am claiming is right as the same accountant and now his son have been filing for me since 1985.  I have been audited before.  And as someone else asked, a person can deduct 10% of household expenses like rent, utilities etc. for office in the home.  Internet and cable are 100% writeoffs as are any subscriptions like SO, globe and mail, economist etc.

[ixero@20 134]

Thank you everyone! I will spend some time reading the links posted here and I will speak again with my accountant. 

15 minutes ago, kyrojin said:

Although there is no definitive rule to determine if a particular transaction is on account of income or capital, the Canada Revenue Agency (CRA) has provided some guidance in their Interpretation Bulletin IT-479R.

This statement fully represents my overall impression of our taxation system. There are never set of definitive rules with a reference to tax payer individual situation. Which probably means that if you have a full time job making  let's say $100k/year and you also trade stock and options part-time making another $10-20k, you'll be fine reporting them as a capital gain. But if your income from trading will increase significantly or becomes your sole source of income in this case you may need to report it as a business income.    

But what does it mean for us? Not too much honestly, in my experience most accountant hesitate to give any advice in advance. Most of the time the answer is "do what you think is the best for you today and if CRA will come back with an audit we will try to deal with it". It's probably because most people don't get audited often and even if they do it is only limited to verification of supportive documentation. 

As a separate note regarding T5008. In overall, I think CRA should mostly ignore them. While IB did a great job calculating all my transactions and converting them to CAD using proper exchange rates, other banks and brokerages don't do it the same way. I happened to make a few trades in my Scotia iTrade account at the beginning of the year and T5008 I got from them is mostly useless. For example, I sold a call for 2.20 and then bought it back for 0.35. T5008 shows this contract in USD with both cost (Box 20) and Proceeds (Box 21) equal to $220. So all CRA could get from this form are my maximum proceeds they can tax if I fail to provide activity statement to justify my cost basis. 

[ixero@20 134]

39 minutes ago, kyrojin said:

I don't disagree with you. I am providing the advice I was given on how one is to be determined if they are considered a trader or dealer in securities. For most of us, we will unlikely to be a dealer. But under certain guidelines, we may be considered a trader. Once you are considered a trader, all income is considered income and not capital gains.

@kyrojin, did you you see any references what these guidelines are? How can I determine if I should be considered a trader or not? 

 

43 minutes ago, kyrojin said:

Here, @ixero@20, is asking how the strategies are to be reported to CRA. In this regard, @Kim, you are absolutely correct, the strategies themselves do not matter.

I was referring to the strategies in my original post because I saw the same criteria as you posted, and SO trades checks off most of these boxes. 

1 hour ago, kyrojin said:

frequent transactions, extensive buying and selling of securities

short periods of ownership

some knowledge of or experience in the securities markets

security transactions form a part of the taxpayer's ordinary business

a substantial portion of the taxpayer's time is spent studying markets and investigating potential securities purchases

security purchases are financed primarily with margin or debt

the taxpayer has advertised or otherwise made it known that he is willing to purchase securities

securities purchased are speculative in nature or do not pay dividends

 

[Kim 7,943]

57 minutes ago, Paul said:

If perhaps I could have claimed capital gains then maybe I am owed money.  I'm pretty sure whatever I am claiming is right as the same accountant and now his son have been filing for me since 1985.  I have been audited before.  And as someone else asked, a person can deduct 10% of household expenses like rent, utilities etc. for office in the home.  Internet and cable are 100% writeoffs as are any subscriptions like SO, globe and mail, economist etc.

If you report it as income, it's not because of short holding period or because it's options, but because of your personal situation. Unlike US, In Canada there is no different taxation for short term and long term gains.

As for deductions - I assume most traders/investors have some dividend paying stocks where dividends are reported as income regardless.

[ixero@20 134]

@Kim, what is your opinion on the item (b) highlighted below? This is IT-479R, section 11. It seems that CRA actually does list short holding period as an indication of business activity.

Quote

 

11. Some of the factors to be considered in ascertaining whether the taxpayer's course of conduct indicates the carrying on of a business are as follows:

(a) frequency of transactions - a history of extensive buying and selling of securities or of a quick turnover of properties,

(b) period of ownership - securities are usually owned only for a short period of time,

(c) knowledge of securities markets - the taxpayer has some knowledge of or experience in the securities markets,

(d) security transactions form a part of a taxpayer's ordinary business,

(e) time spent - a substantial part of the taxpayer's time is spent studying the securities markets and investigating potential purchases,

(f) financing - security purchases are financed primarily on margin or by some other form of debt,

(g) advertising - the taxpayer has advertised or otherwise made it known that he is willing to purchase securities, and

(h) in the case of shares, their nature - normally speculative in nature or of a non-dividend type.

 

 

Edited March 7, 2021 by ixero@20

[Kim 7,943]

1 minute ago, ixero@20 said:

@Kim, what is your opinion on the item (b) highlighted below? This is IT-479R, section 11. It seems that CRA actually does list short holding period as an indication of business activity.

 

Yes - but this is not black and white like in the US where everything under one year is defined as short term capital gains. Who decides what's short period of time? One week? One month? 3 months? Plus they mention that this is one of the factors, not the only factor. What about someone who has a full time job but also trades and holds for short period of time?

But again, the main point here that it's not about options or stocks - it's about many other factors, and it's probably better to let the professionals to do their job and advise you how to treat it. And if in doubt, second opinion is always advisable.

[ixero@20 134]

Thank you everyone! I think I got better understanding of taxation implications to have more constructive discussion with my accountant now. I will post an update here once I speak with her again.  

[kyrojin 4]

7 hours ago, ixero@20 said:

@kyrojin, did you you see any references what these guidelines are? How can I determine if I should be considered a trader or not? 

 

I was referring to the strategies in my original post because I saw the same criteria as you posted, and SO trades checks off most of these boxes. 

 

@ixero@20, to be honest, I couldn't find anything online that would point me to any definitive guideline. The best I could find is this:

https://taxinterpretations.com/node/393961

Quote

The fact that a taxpayer generates a given number of transactions annually is not, in and of itself, a determining factor. Similarly, the fact that a taxpayer reports a large loss in the first year in which the election is made is also not a determinative factor. However, these factors could be indicators of the presence of any of the factors mentioned in ¶11. The presence of a combination of these factors may lead to the conclusion that the taxpayer's activities are those of a business.

The same letter states that the courts will use a combinations of the factors listed above (from IT-479R). However, it does not indicate how many in combination will be taken into consideration. As stated previously, I was advised based on my situation where I fulfill a number of the factors, I would be better served to treat my income as business income than capital gains. This may or may not apply to you.

6 hours ago, Kim said:

Yes - but this is not black and white like in the US where everything under one year is defined as short term capital gains. Who decides what's short period of time? One week? One month? 3 months? Plus they mention that this is one of the factors, not the only factor. What about someone who has a full time job but also trades and holds for short period of time?

But again, the main point here that it's not about options or stocks - it's about many other factors, and it's probably better to let the professionals to do their job and advise you how to treat it. And if in doubt, second opinion is always advisable.

I totally agree with @Kim here. It is not the fact that the holding was a short period of time (and it is unclear what is determined to be short). But rather say for example, there were many transactions, most or all of which were short term. The funds for the transactions were obtained through financing to purchase stocks and options in equities which are speculative in nature. The complexity of the transactions (various options strategies) would then also point to thorough understanding of securities markets. For someone that was trading in circumstances in this example, it would be likely looked at as business income.

If in doubt, contact the tax professionals and sort out your personal situation.

[kyrojin 4]

@ixero@20, I dug some more and found some interesting case laws around this. To be honest, I haven't read through all of them yet but some food for thought for all.

https://htkacademy.com/business-income-vs-capital-gains/

https://ummattaxlaw.ca/2019/05/21/are-you-earning-capital-gains-or-income/

https://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/230346/1/document.do

https://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/26964/index.do

https://decision.tcc-cci.gc.ca/tcc-cci/decisions/en/item/29032/index.do

[ixero@20 134]

@kyrojin, thank you very much for sharing the links. They are really eye opening and provide better understanding how the rules are applied by the court.  

I quickly scanned through the hearings transcripts. It seems that the court was very strict with a licensed investment professional despite the fact he held his positions over 50 days and made only 30% return while the broad market made 40%. And at the same time the court was willing to offer 50/50 split between capital and income for a "casual" investor even he held some positions for less than a week and couldn't explain how he came up with these companies names. Other than telling the court he looked them up in internet chats. 

These cases clearly demonstrate what you and @Kim meant by "personal situation". I just find it a little frustrating that we have to refer to court rulings to understand how tax law is applied. I believe CRA should have provided more clear guidance rather than IT479 publication which was last updated in 1984.

Having said that, this brings us to very interesting dilemma. Personally I believe that SO trades we do here should be reported as business income. They just check off much more boxes that they don't. If CRA will ever challenge the business income choice, we can build a really strong case to support it.

However being an ordinary guy who has full time technology consulting job with some extra trading on a side, I don't specifically see an issue with reporting gain as capital. Especially accounting for all the uncertainty around the rules. CRA indeed doesn't  provide any thresholds to the duration of a trade, number of transactions per annum or any other metric. In my opinion the worst case scenario will be that in case of an audit, CRA will reassess the gains as income and will ask for more taxes plus interest. I just don't see with these rules how can they impose any sort of tax evasion charge which could lead to a fine.   

Again, I will speak with a tax professional before making a decision. All these may sound like a rant, but being an incorporated consultant in Canada I am getting a little bit tired that every time I have to deal with CRA I find myself in a grey area. I think I am starting to admire US tax system. While it is more strict, they seems to have more clear guidelines to follow.   

 

Edited March 8, 2021 by ixero@20

[DavidK 1]

Hello,
I'm new to this forum. I have also looked into whether the options trades I make should be treated as capital gains or income. I'm not an accountant, so I have no expertise in this area, but everything that I've read online has always left the criteria as unclear and fuzzy. I did want to point out some additional complications of deciding to claim your options trades as capital gains:

1. There are some additional rules for handling of options when the selling/buying crosses the fiscal year end. This also mean you may have to refile your previous years taxes to do it properly. See this article on Taxtips.ca for a good summary.
2. For Captial Gains - Canada has the superficial loss rule that covers 30 days before and 30 days after a transaction settles. This is meant to prevent tax loss selling (and then reaquiring the same shares) but it also applies to buying a call before or after selling shares. A good article that explains some details is here. This will depend on what options strategies you are using.

Many of these complications go away if instead declare your profits/loss as income.

One last thing I have come across - is don't forget to complete form T1135 (Foreign Property), if at any point during the tax year you owned foreign property over $100K. This includes: foreign stock, property, and insurance policies. Is does not apply to items held in TFSAs or RRSPs. There really isn't any tax implication, but the fines for not filing this are onerous.

 

 

[DavidK 1]

One other item of mention - I saw that the T123 form was mentioned earlier. This is the declaration that you want all "Canadian" securities treated as capital gains. Under item 23 in the IT-479R

It says:
23. A share option is not a Canadian security within the definition in subsection 39(6). As a result, share option transactions cannot qualify for the guaranteed capital gains election (see 2 above).

 

[skammy88 1]

This is not accounting advice, just what my accountant is doing for me. 

Options = cap gains

Day trading (in and out of positions within seconds/minutes, nothing held more than 1 day) = income

 

Some insights regarding option taxation:

https://www.taxtips.ca/personaltax/investing/taxtreatment/options.htm

[ixero@20 134]

As an update - I spoke with my accountant. In my particular situation she advised to report profits as capital gain. It was primary based on the fact that I have a full time job and profits from trading were very small comparing to my overall income. However, if I become very successful (which I truly hope will happen one day) or switch trading full time I should call back to reassess the situation.

As a general comment, she noted that there is no strict CRA guidelines (as we have discussed above)  and all "regular" guys doing trading on a side fall in a grey area. This means that either way I decide to report my gains or losses I should be prepared if CRA comes and re-assesses them differently.

And on a very special note, she was very surprised that I didn't blow up my account in my first year and even have profits to report. For that I would like to send kudos to @Kim and @Yowster for creating such a wonderful community for us.