As the famous saying goes, “In this world nothing can be said for certain except death and taxes”.
While Benjamin Franklin – who originally coined the idiom in a 1789 letter to Enlightenment thinker Jean-Baptiste Le Roy – might have originally been talking about the new US Constitution, it also applies to the online trade and investment.
As online trading and investing platforms have become more accessible, forex trading in Canada has only grown in popularity. And with hundreds of low-cost, easy-to-use platforms popping up in recent years, there really has never been a better time to dip your toes into the financial markets.
However, while these platforms have significantly lowered the barriers to entry into online trade 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 hurdles that can make growing your investment portfolio a bit of a nightmare.
Taxation is one such obstacle. And, no matter how much we would like to avoid the subject, as Benjamin Franklin noted, it is something that ultimately there is little we can do to avoid.
That said, if you’re 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 key tax considerations. e-commerce in Canada. . And, whether you’re investing for your retirement in Canada or day trading for a living, this article is a great place to start!
What type of trader are you?
When it comes to online trading taxation in Canada, the first question you need to ask yourself is whether you are a day trader or a long-term investor.
If you are the first, you buy and sell assets, stocks and other financial instruments daily in order to make short-term profits on price fluctuations. If you fall into this category of traders, any earnings you make must be reported as business income.
This last type of trader is a long-term investor. If this is you, then buying and selling is done with longer term goals. In this context, you must declare any profit or loss you realize on a capital account.
The difference between these two types of business approaches is important, as it will determine the type and amount you will have to pay in taxes.
Long-term investors who trade infrequently will treat any profit made on a stock or asset from a sale as a capital gain. Thus, 50% of the gains they realize will be taxed at the marginal tax rate applicable to them. Any losses they realize can be used to reduce any capital gains tax that may be due, although trading costs incurred when buying or selling cannot.
There are also other taxes you may be subject to, including interest and dividend income.
This differs from the shorter-term investor, who will report trading profits as taxable business income. This will be set at different rates from the capital gains tax system. It is also easier to claim all expenses incurred in undertaking day trading against business income. This has obvious benefits from a tax efficiency perspective, although it can be difficult to track!
How can I reduce my tax burden in Canada?
As in many other parts of the world, there are various strategies you can adopt to reduce, but not necessarily completely avoid, your tax burden.
This includes the following:
- use tax-advantaged trading and investment accounts;
- engage in tax-loss harvesting;
- donating assets to charity to generate a tax receipt;
- carry forward any losses to the following year.
Of these, most Canadian investors will find tax advantage accounts to be the easiest and most useful way to reduce their tax burden. This will likely involve using specific types of registered investment accounts that offer different benefits. For example, Registered Retirement Savings Plans (RRSPs) and RRIF accounts are tax-sheltered, which makes them particularly advantageous for investments that pay 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 generally not taxable in the account. or when eventually removed.
These tax-advantaged and tax-advantaged accounts are a great way to protect your investments against the vagaries of the economy, while enjoying a lower tax burden!
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