I was audited for trading. Frequent speculative trading is and will be targeted for years to come. They have just started to skim the surface. They have hired a lot of new auditors in the last few years.
The tax boys think the rules are pretty straight forward. They look at your intent(short term vs long term holds). If you hold a security for short durations, and you make good money, they will go after you.
They look at the speculative nature of the securities. Pennies are spec stocks in their mind,...if you trade them a lot, and make good money, they will go after you. Speculating is trading in their rulebook.
They look at whether you hold the securities to primarily make income (dividends and interest) instead of capital gains. If your primary purpose is to make capital gains(any security that doesn't give you dividends or interest), and you make good money, they will want to treat you as a speculator.
They look at the length of time you hold the security. Less than one year, and if you made a lot of money, they will look closely.
I should point out that if you borrow to make income(including margin accounts), and claim capital gains and losses, the primary intent of your investments better be to make income (dividends and interest), not capital gains or they will disallow the borrowing costs. Obviously if you are playing stocks that do not give dividends, and you make a lot of money, the government will go after you.
If you make little money,...they will probably ignore you.
I traded mutual funds,...frequently,...they wanted to treat me as a speculator. This helps them several ways. If they treat this income as business income, you must pay CPP on your income. This is where they got me. I had enough business deductions, and excess RRSP contributions to wipe out the extra business income (25% extra from capital gains treatment). But after I paid all the CPP and interest for 4 years, I received a $10000+ bill. The longer you wait, the more you will owe, and they like it a lot if your activity goes back many years. My interest was almost half my bill.
For the last 5 years I got accountants to advise me on this capital gains crap. They all said to go ahead treating it as capital gains. The auditor suggested I sue them. Since I told my accountants this, I get invited to all their great parties.
There are some solutions. You can make a one time election that all income from stock trading be treated as capital gains. Of course, then you will limit the deductions you can take, and you cannot change to income treatment after that. Even still, the government may take you to court,...I'm unclear what the outcome would be,...but the fight may cost you more than the difference in income tax. Professional traders(the government has a definition-you better look at it closely) that have made this election, were taken to court and lost. They include ones working for brokerage firms, and private ones, according to my auditor.
Also, you apparently can separate your stock holdings and treat them differently, even if they are in the same account. I was told this by the auditors, but I think I would hold them in separate accounts to be safe. A stock like Bell, which you intend to keep forever for dividends, could be subject to capital gains treatment, whereas stocks that you flip could be treated as business income. All expenses you incur to make stock business income can be deducted,...home office, travel, conventions, agms, trips to see businesses, telephone calls, cable for ROB TV, internet,university courses, training, investment books and letters, computers, nice-looking secretary (ggggggggggggggg) etc,etc. Seems like this approach could give you the best of both treatments.
Simple advice when going the business income route,...whatever you make outside the RRSP, spend it on stock business things you enjoy doing,...conventions, agm's, business lunches, etc. The convention could be in Florida for instance,...just make sure you keep a diary of the business things you did, and take pictures of business things. For example, I claimed a trip to Disney and Universal. I told the auditor I would not invest in Seagram or Disney unless I took the tour, and convinced myself it was worth the money. I talked to staff, took pictures, recorded what we did in the diary and got a full deduction when I presented this evidence of business intent. When you spend all the stock business income this way, three things happen, the government gets nothing, you enjoy your life, and you can't lose what you already spent :-)))) I think most rich people chose this route. They allow their paper assets to make them billionaires,...if you never sell, the taxman can never get you (until you die at least), and if you spend all your business income enjoying your life on business things, you pay no tax. I wish someone told me this about 20 years ago. |
