Many people found the time in the past year to trade stocks more frequently at home. Unfortunately, day traders may face a bigger tax bill if they meet certain CRA criteria. Kim Parlee speaks with Georgia Swan, a Tax and Estate Planner with TD Wealth, about what investors should be wary of.
Print Transcript
- Well, many people have been at home this year, and many people have more time to trade. And so they've been doing a lot of buying and selling stocks. And perhaps they're trading so much that the CRA has taken notice and may consider you a day trader. Georgia Swan is a Tax Estate Planner with TD Wealth. She joins us now to tell us why that matters.
And, Georgia, let's just start with the basics-- why do I care whether the CRA thinks I'm a day trader or not?
- Well, hi, Kim. It's good to see you. And one of the things that we look at from this is part of the allure of buying and selling securities is the fact that if you buy low and sell high, that income is capital gains income, which as we know in Canada right at the moment, only 50% of that income will be taxed. So obviously, it's attractive.
The problem is, depending on how you actually go about doing all this trading, the Canada Revenue Agency may come along and say, you know what? This walks like a business and it talks like a business, so we're going to make that income that you thought was capital gains income actually be treated as business income, which as we know, all of business income is included in your taxable income.
- All right. So that's a biggie. So that means all those gains that you made that you thought 50% were tax free, were not. So that's something where people sit up and pay attention right there, Georgia. So let's talk a bit about what does the CRA look at to determine whether you are in the business of trading versus just someone who occasionally trades.
- Well, they look at something called badges of trade. And there's kind of eight general ones and four that are unique to securities. And then they also look at, what was your intention in the first place with respect to these assets? So no one of these badges of trade is determinative, and there's nothing that says if you get 7 out of the 12, then you're over the edge, or if you only have five, then you're safe. The CRA will really look at the totality of the situation and how you are approaching this.
- OK. Well, again, we don't know. It's kind of like the Google algorithm-- we don't know exactly how it all works, but we know the criteria they look at. So let's talk about the badges of trade. What are they?
- So one is, like I said, intention. The other one is frequency of transactions. How often are you trading? How much work and time are you spending on these and additional research? Specifically with securities, they might look if you're buying on margin. They also look is how long you've held these securities for.
And then they look at whether you're talking this up. Are you on social media and on all those sites where people talk about investing? And are you saying, I've got some good ideas here? So that's also important. Be careful who you're talking to.
- If we could just go back for a second, because you talk about things like how long you hold something versus how much time you're spent doing something. So if you hold something for an hour, does that probably move them towards a spectrum of whether you hold something for a year-- just to give people perspective.
- Yeah, and that's a great way to put it. The idea is that, as I said, there isn't one thing that's determinative. But when you look at day traders, they tend to be doing trades very, very quickly. When you look at long-term investors, there are people that will buy certain securities and basically hold them for the long haul, and make what they think they should out of it. So if you're looking at these and saying, I see myself in these, you should actually be looking into this issue a little bit further.
- Do you get any kind of warning? I guess the first question is, how does the CRA know? But I always assume the CRA knows many things. And then do you do they give you a warning to say, hey, be careful? Or does it just happen?
- No, there's really no warning. Basically, you'll file your tax return, and the CRA will send back a notice of assessment saying, you know what? We've been looking at your activities, and we don't think that this should be capital gains income. And we're re-categorizing it as business income.
So at that point, you have to file a notice of objection to try to say, well, no, I don't agree with you. But as I said, the CRA will look at a lot of things. If all of a sudden you've been an employee for many years, and all of a sudden you start reporting significant capital gains income or dividend income, they'll look at that.
They look at social media sites. They look at the record of transactions of your non-registered accounts to see what's going on. So there's a number of ways that they could potentially find out. And also, they do spot audits for these types of things. So the information does come to them. And it does happen that people get reassessed.
- I've only got 30 seconds, Georgia, but what should I do if I think that I may be falling into that category?
- So like I said, if you recognize yourself in any of these badges of trade, the best course of action is to make sure that you speak to a really good tax lawyer or a really good tax accountant. And if they agree that maybe you're getting close to the edge, I'm not saying you still don't file the income as capital gains income, but maybe it's a good idea to also calculate what your tax liability would be if you do get it reassessed as business income-- and maybe just hold that off to the side for a little while, just to see if you're OK. Otherwise, maybe you do want to be seen as a day trader, and that's a different story.
- We'll have you back to talk about that one. I think that's something a lot of people's appetites were whet over the past while as they've been figuring this out. Georgia, always a pleasure. Thanks so much.
- Thank you, Kim. Good to see you again.
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And, Georgia, let's just start with the basics-- why do I care whether the CRA thinks I'm a day trader or not?
- Well, hi, Kim. It's good to see you. And one of the things that we look at from this is part of the allure of buying and selling securities is the fact that if you buy low and sell high, that income is capital gains income, which as we know in Canada right at the moment, only 50% of that income will be taxed. So obviously, it's attractive.
The problem is, depending on how you actually go about doing all this trading, the Canada Revenue Agency may come along and say, you know what? This walks like a business and it talks like a business, so we're going to make that income that you thought was capital gains income actually be treated as business income, which as we know, all of business income is included in your taxable income.
- All right. So that's a biggie. So that means all those gains that you made that you thought 50% were tax free, were not. So that's something where people sit up and pay attention right there, Georgia. So let's talk a bit about what does the CRA look at to determine whether you are in the business of trading versus just someone who occasionally trades.
- Well, they look at something called badges of trade. And there's kind of eight general ones and four that are unique to securities. And then they also look at, what was your intention in the first place with respect to these assets? So no one of these badges of trade is determinative, and there's nothing that says if you get 7 out of the 12, then you're over the edge, or if you only have five, then you're safe. The CRA will really look at the totality of the situation and how you are approaching this.
- OK. Well, again, we don't know. It's kind of like the Google algorithm-- we don't know exactly how it all works, but we know the criteria they look at. So let's talk about the badges of trade. What are they?
- So one is, like I said, intention. The other one is frequency of transactions. How often are you trading? How much work and time are you spending on these and additional research? Specifically with securities, they might look if you're buying on margin. They also look is how long you've held these securities for.
And then they look at whether you're talking this up. Are you on social media and on all those sites where people talk about investing? And are you saying, I've got some good ideas here? So that's also important. Be careful who you're talking to.
- If we could just go back for a second, because you talk about things like how long you hold something versus how much time you're spent doing something. So if you hold something for an hour, does that probably move them towards a spectrum of whether you hold something for a year-- just to give people perspective.
- Yeah, and that's a great way to put it. The idea is that, as I said, there isn't one thing that's determinative. But when you look at day traders, they tend to be doing trades very, very quickly. When you look at long-term investors, there are people that will buy certain securities and basically hold them for the long haul, and make what they think they should out of it. So if you're looking at these and saying, I see myself in these, you should actually be looking into this issue a little bit further.
- Do you get any kind of warning? I guess the first question is, how does the CRA know? But I always assume the CRA knows many things. And then do you do they give you a warning to say, hey, be careful? Or does it just happen?
- No, there's really no warning. Basically, you'll file your tax return, and the CRA will send back a notice of assessment saying, you know what? We've been looking at your activities, and we don't think that this should be capital gains income. And we're re-categorizing it as business income.
So at that point, you have to file a notice of objection to try to say, well, no, I don't agree with you. But as I said, the CRA will look at a lot of things. If all of a sudden you've been an employee for many years, and all of a sudden you start reporting significant capital gains income or dividend income, they'll look at that.
They look at social media sites. They look at the record of transactions of your non-registered accounts to see what's going on. So there's a number of ways that they could potentially find out. And also, they do spot audits for these types of things. So the information does come to them. And it does happen that people get reassessed.
- I've only got 30 seconds, Georgia, but what should I do if I think that I may be falling into that category?
- So like I said, if you recognize yourself in any of these badges of trade, the best course of action is to make sure that you speak to a really good tax lawyer or a really good tax accountant. And if they agree that maybe you're getting close to the edge, I'm not saying you still don't file the income as capital gains income, but maybe it's a good idea to also calculate what your tax liability would be if you do get it reassessed as business income-- and maybe just hold that off to the side for a little while, just to see if you're OK. Otherwise, maybe you do want to be seen as a day trader, and that's a different story.
- We'll have you back to talk about that one. I think that's something a lot of people's appetites were whet over the past while as they've been figuring this out. Georgia, always a pleasure. Thanks so much.
- Thank you, Kim. Good to see you again.
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