Day traders, track your trades, or tax time can get ugly
'Do it as you go along': Sea of transactions must be properly reported to taxman
Tony Wanless
The Province
Nick Didlick, National Post
Kevin Mason developed a system of recording online trades. It was done to help out at tax return time.
VANCOUVER - If you're among the legions of Canadians who have jumped into the stock market game, buying and selling stocks on your own, here's an important piece of advice: Keep good records of your trades, or tax time will be a real trial.
Six years ago, when Kevin Mason was a day trader, income tax season signalled the beginning of his bad dreams. He encountered a nightmare of accounting books, acres of paper and reams of records. Mr. Mason, a financial analyst and amateur stock market investor, had run into the downside of direct stock market investing. When you do it yourself, you also have to keep your own records. And if you haven't done it well, tax time can be ugly.
If all your investing is done within a registered retirement savings plan, this isn't much of a problem, because there are no tax implications on a year-to-year basis. But in the past year, thousands of Canadians have taken to trading in a big way, often in the United States, and often outside their RRSPs. Now, in the midst of tax season, they are faced with reconciling all that trading and navigating through the differing tax treatment of various forms of investment income.
Mr. Mason, who began online trading in its earliest days, developed his own spreadsheet system to keep track of trades. "When I first got into it, it was a huge bookkeeping nightmare. When you trade, and score, it's intoxicating, and addictive. Record keeping is the furthest thing from your mind, because it's boring. I probably spent a couple of days that first year reconciling my trade records."
He eventually developed a system to regularly record all his trades, and still uses it diligently even though he doesn't trade as frequently. "If you trade regularly, you definitely want to stay on top of it and keep it in a record somewhere. Sure, brokerages give you paper records of all your trades, but if you don't record them and file them regularly, you could face stacks of them at year-end.
"If I could say anything, I'd say do it as you go along. At the least, do it once a month, even if you have to enter it into a ledger by hand. And keep all your paper records organized and together."
Tony Mastrangelo, a Vancouver-based chartered accountant and financial planner, says a big source of trouble for investors who actively invest outside RRSPs is the different types of income related to mutual fund distributions. It can be capital gains, dividends and/or interest. Another headache is the reporting of foreign investment gains. For example, dividends from foreign securities do not benefit from the dividend tax credit, but foreign capital gains are treated as if they were earned in Canada.
There's also the risk you might have become a professional trader without knowing it, and it will cost you. If you've been particularly active, the tax department might consider you to be in the business of trading, and capital gains might be taxable as business income.
Profits from capital investments such as stocks and mutual funds -- and from sales of bonds -- normally are considered capital gains, which means only three-quarters of the proceeds realized in 1999 are taxable. (For transactions after Feb. 27, 2000, this inclusion rate fell to two-thirds.) However, if you're designated as being in the business of trading -- which is governed by such exotica as other income, frequency, purpose and costs -- profits are treated as business income and fully taxed.
"The increased incidence of this, coupled with the recent reclassification of capital gains rates, provides more of an incentive to convert income to capital gains income," Mr. Mastrangelo says. "This kind of situation will likely be watched more closely."
The difference between a professional trader and an amateur is vague and frequency alone is not enough to draw the line. Other factors are involved, and it's usually a combination of them that forms a judgment call for the Canada Customs and Revenue Agency (formerly Revenue Canada).
Trading is governed by the Income Tax Act. Among factors to be considered are transaction frequency, period of ownership, knowledge of securities markets, time spent studying securities, and financing.
The definition of a trading business or "an adventure or concern in the nature of trade" involves an opinion, and the CCRA has been fairly liberal with it so far, says Collette Gentes-Hawn, an agency spokeswoman. "We are in tune with what's going on," she says. "But we have found no need yet to issue new guidelines. We're still judging this case by case." |
