Online Trading Taxation in Canada

As the famous saying goes: “In this world nothing can be said to be certain, except death and taxes.”

Whilst Benjamin Franklin—who originally coined this idiom in a 1789 letter to Enlightenment era thinker, Jean-Baptiste Le Roy—might have originally been talking about the newly penned American Constitution, it is equally as applicable to online trading and investments.

As online trading and investment platforms have become more accessible, forex trading in Canada has only grown in popularity. And with hundreds of low cost, easy to use platforms bursting onto the scene in recent years, there truly has never been a better time to dip your toes into the financial markets.

However, whilst these platforms have significantly lowered the barriers for entry to online trading and investment, with the result that millions of Canadians across the country have now taken control of their own financial futures, there are still a number of obstacles which can make growing your investment portfolio a bit of a nightmare.

Taxation is one of these obstacles. And, regardless of how much we might want to avoid the topic, as Benjamin Franklin noted, it is something we can ultimately do little to avoid.

With that said, if you are one of the millions of Canadians using online trading platforms to manage and grow your investment portfolio, this article will provide a high-level overview of the main things to think about when it comes to online trading taxation in Canada. And, regardless of whether you are making investments for your retirement in Canada or day trading to earn a living, this article is a good place to start!

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What type of trader are you?

When it comes to online trading taxation in Canada, the first question that you need to ask yourself is whether you are a day trader or a long-term investor.

If you are the former, you are buying and selling assets, equities, and other financial instruments on a daily basis as a way of making short-term profits on price fluctuations. If you are this class of trader, any gains you make should be reported as business income.

The latter type of trader is a long-term investor. If this is you, then the buying and selling is done with longer term goals in mind. In this context, you should report any profits or losses you make on a capital account.

The difference between these two types of trading approaches is significant, as it will determine what kind and how much you will be required to pay in taxes.

Long-term investors who make infrequent trades, will treat any profits they make on an equity or asset following a sale, as a capital gain. As such, 50% of the gains they make will be taxed at whatever marginal tax rate is applicable to them. Any losses they make can be used to reduce the capital gains tax that might be due, although trading fees incurred in the purchase or sale cannot.

There are also other taxes that you might be subject to, these include interest and dividend income.

This differs from the shorter-term investor, who will report their trading profits as taxable business income. This will be set at different rates to the capital gains tax regime. It is also easier to claim back any expenses incurred to undertake the day trading against the business income. This has obvious advantages from a tax efficiency perspective, although it can be tricky to keep track of!

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How can I lower my tax burden in Canada?

As in many other parts of the world, there are various strategies you can adopt to lessen—although not necessarily completely avoid—your tax burden.

This includes the following:

  • using tax advantaged trading and investment accounts;
  • engaging in tax-loss harvesting;
  • donating assets to charity to generate a tax receipt;
  • carrying over any losses to the next year.

Of these, most Canadian investors will find using tax advantaged accounts the easiest and most useful way to lessen their tax burden. This will likely involve using specific types of registered investment accounts that come with different benefits. For example, Registered Retirement Savings Plans (RRSPs) and RRIF accounts are tax-sheltered—which makes them particularly good for investments that pay out interest and dividends!

There are also other options available to Canadians, such as ‘Tax-Free Savings Accounts’ or TFSAs, where capital gains, interest, and dividends on investments are not usually taxable in the account or when they’re eventually withdrawn.

These tax efficient and advantaged accounts are a great way of shielding your investments from the ups and downs of the economy, whilst also taking advantage of lower tax burdens!

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