Any full-time traders, or accountants on here? question regarding taxes

[Rat Fink]

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[Canmorite]

Yes all your profits will be taxed as income. If you incorporate yourself I think you can save a bit come tax time, but I'm not sure on the specifics.

The CRA will most likely look at how many trades you are doing a month/quarter to determine whether or not they are going to tax your profits as capital gains or income.

I think its more then 4 trades a week that which qualifys you as an 'active trader'?

[Rat Fink]

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[RX_EVOLV]

i think if you trade full time, you can claim the trading platform cost ( ie L2 etc) as tax deductibles

[Rat Fink]

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[Canmorite]

Originally posted by Rat Fink


Now, since I currently have a full-time job.....do you think I could still get nailed with income tax on my trading to date?....or would this still be capital gains?

Really, my full-time job I have now supports my cost of living.

If they look at your trades per month/quarter, they will most likely deem you are trading for income. I think this also depends on how much you are withdrawing from your account to pay your daily expenses. If you aren't, you might be able to sway them.

Originally posted by Rat Fink


ya, and you can claim part of your rent/mortgage because you have an office, you can claim your internet connection, etc....even know of guys who have claimed their cable T.V.

What I'm interested in is whether or not I will be taxed as income tax, or capital gains.......both in my current situation (working full-time but also trading actively), and in the event of me starting to trade full-time.

From the reading I've done....there is a very grey area that is open for interpretation. Almost like I can choose either way to do it.

...I'd hate to pay as if it was capital gains....then have them come back to me and tax me as if it was income tax, and now I'm left with a 20K tax bill to cover.

You can claim your charting packages, internet, computers, screen, etc etc. A lot of things are deductible. (Hopefully commish too, wouldn't that be nice!)

I think you need to get a hold of someone who has dealt with this a lot. I will ask around because I know quite a few people who have been through these tax problems before.

[Rat Fink]

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[broken_legs]

Originally posted by Rat Fink
Well, I found out I can fill out a form T123, to elect my gains to be considered "capital gains". This will make all trades, and all future trades for life, to be considered capital gains.

Apparently this is non-reversible....so when it's done, this is how it will be for life. I don't see the downside to this at all. Sure, I might not be able to expense my little 80/mo L2 info, or internet connection because I won't be considered a business....but the thousands in tax savings should offset that by far.

Maybe you should hold off on that


As I understand it Corporate tax rate is only 17% on the first 300,000 dollars of Net Profit.


After that it goes to around 30% (???) I believe.

Now if you have the right corporate structure you can claim an automobile, house all sorts of stuff, you just name yourself the director or whatever

You can pay yourself up to 30,000/yr (???) in dividends which are tax free through your corporation too.


Of course you could still do all of this after you fill out that t123 because if your corporation is doing the trading than it doesn't really matter what your personal taxes are.

Thats kind of how i understand things anyways, not sure if its different for an investment coporation

PLease let us know what you find out Rat

[Rav4Guy]

Have you thought of Flow-Thrus?

Your trading activities will be under Cap Gains. I know you did a lot of it but it's still not your full time job.

[Mckenzie]

Some clarification and things to consider

1- Rat Fink- there is no grey area to your situation...your trading activities indicate you are trading to earn income to the CRA. Regardless of your job, it is always substance over form. It would be hard-pressed for you to argue that you made a trade in the morning to earn a capital gain in the afternoon (therefore it is income).

2- If you elect T123, yes your investment gains will always be treated as capital gains but that is not the case because you are earning income.

3- Corporate taxes up to the small business deduction limit are 12% of the ENTIRE gain...not just 50%. There will also be some advantage to writing off certain expenses. However if you slow your trading activity down and the CRA assesses you as only making capital transactions then you will be hosed by paying tax on Aggregate Investment Income at like 45%. Part of this will fire up a refundable dividend (look up RDTOH) for your corporation though when you pay yourself a dividend and it will also generate a tax free capital dividend [but that is only for capital / investment income, not business income].

4- Dividends are not tax free. They are grossed up, taxed and then you receive a dividend tax credit on your tax bill. They will likely be eligible dividends, paid out of small business income.

5- Dont forget that eventhough you are paying less tax inside a corporation, you will still be taxed on dividends personally.

6- I will have to check but I seem to remember hearing that incorporating soley for sheltering personal tax liabilities from investing generates additional tax consequences, but I cannot remember.

[Canmorite]

...and in steps the accountant.

[Mckenzie]

Originally posted by Canmorite
...and in steps the accountant.

haha I'm surprised you weren't all over it- it is your favorite subject from what I hear.

[Rat Fink]

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[Mckenzie]

Originally posted by Rat Fink


Wow, thanks Mckenzie,

So incorporate myself, and make sure I'm a share trading whore for the entire year? (say, 75-150 trades/quarter to keep active)? Bascially keep myself in the trading range that would make it well known and obvious that I am in it for income, and that will keep me clear of aggregate investment income?

What do you mean by dividends. Are you talking dividends paid out for a certain stock? I've never traded a stock that pays dividends, so I should be clear on that? Heck, I've ever only owned a share over $5.00 once...maybe twice. haha.

....i think I'm going to sit down with an accountant other than my uncle, and go through all of this. I'm totally new to this end of things.

Well the number sounds kinda scary for AII but it kinda switches around because it is taxed at the capital gains level, not the full amount at that rate. (50% taxed at AII, 100% taxed on Active Business Income- ABI).

You make $100 in gains.
ABI- $100 taxed at 11% - $11 taxes
AII- $50 taxed at 45% - $22.5 taxes

And as for dividends, you will want to take money out of your company somehow so if you dont take out a salary then you need to take out dividends, which are taxed personally.

I dont have time to get into RDTOH or Capital Dividends now but they are a nice tool to use if claiming / earning capital gains and taking out dividends from a company. Keep in mind there is the concept intergration that the CRA uses which basically aims to make no difference in tax liability between incorporating and being taxed personally- although it sounds stupid, it is not too far off.

If I have time in the next little while I'll try and do a comparison for you to see what the difference is.

[liquid1010]

This is an interesting thread.... and some great responses by McKenzie.

I'm just curious as to how one defines the line between ABI and AII? Also, is the basic tax rate for AII really 45%?

[Mckenzie]

Originally posted by liquid1010
This is an interesting thread.... and some great responses by McKenzie.

I'm just curious as to how one defines the line between ABI and AII? Also, is the basic tax rate for AII really 45%?

1- ABI is typically what your company does on a daily basis to earn money. If you sell hot dogs, widgets, backpacks, pens, etc. to customers, that is business income. So in the case of trading, if you have no other income stream, then you are actively trading for the business' income and are taxed accordingly.

2- AII- Is:

• net taxable capital gains for the year, reduced by any net capital loss carry overs deducted during the year
• income from property including interest, rents, and royalties, but excluding dividends that are deductible in computing Taxable Income.

Coles notes- taxable capitial gains, interest, royalty and rent income but not dividends.

3- AII tax rate is the top corporate rate (I think I saw 38%) plus 6.67 ART (Additional Refundable Tax). The purpose of this is to penalize a company for hoarding investment income inside a company and not paying it out; but some of it is paid back when the company pays a dividend.

4- RDTOH- Basically what happens is 26 and 2/3% of all AII for the year is put into an account called RDOTH (Refundable Dividend Tax on Hand). This is a cumulative account balance and basically when you pay out a dividend, the company gets the tax back, up to the lessor of the balance in the RDTOH account or 1/3 of the dividend paid.

5- Capital Dividend- The non-taxable portion of any capital gains made during the year (the other 50%) is put into this account and can be paid out to shareholders tax free. It is a special dividend called a capital dividend and like the RDTOH, it is a cumulative account.

[broken_legs]

Hey Mckenzie:


I've looked into corporate structure with real estate holding company, operating company, and mgmt company before.

I always thought there was a limit to our tax free Dividends you could receive - Somewhere around 30,000 dollars?

Maybe I'm confusing taking out dividends enough to equal one of the tax brackets?

[Mckenzie]

Hmm I'm not sure- if they are capital dividends paid from the CDA then there is no limit to them. I've been taking dividends out of my company for 6 years now and have been taxed every time.

I guess in theory there is the basic personal exemption if you have no income.

[Rat Fink]

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[Mckenzie]

The business management aspect might be plausible given that you would be incorporated, but might be considred pushing it since your company is a trading vehicle and not a mangement company (substance over form ftw always).

And as for the plane, it seems reasonable as long as it is used for business purposes. Any portion not used for business would be pro-rated accordingly for the tax deduction. However likely they will flag an airplane and deny anything not related to business use in an audit IMO.

Dream big or go home!