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Tax Planning for You and Your Family 2019 by KPMG. p 100.

If you wish to ensure that your trades on the stock market will always result in capital gains rather than business income, you may file an “Election on Disposition of Canadian Securities” (federal Form T123) with any year’s tax return. This will prevent the CRA or Revenu

p 101.

Québec from claiming that you are buying securities for the purpose of selling them and therefore earning business income rather than capital gains. Once you do so, all “Canadian securities” you ever own will be considered to be capital property for the rest of your life. This includes, generally, shares in Canadian corporations, investments in mutual funds, and bonds, debentures or other debt issued by individuals or corporations resident in Canada (except a corporation related to you). Certain taxpayers, such as traders and dealers, are not allowed to make this election.

The downside of making the election is that you will never be able to claim losses on Canadian securities as business losses in the future. Since this is generally hard to do in respect of shares anyway, this may not be a problem for you. You should consider your entire financial position and obtain professional advice to determine the likely effects of the election.

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A 'business loss' for Canadian tax purposes reduces your income by 100% of the loss. ie: if you have 100k of income and a 40k business loss, you get taxed on 60k of income.

Compare this to a 'capital loss', which is the loss on disposing of 'capital property', which only reduces your income by 50% of the loss. ie: if you have 100k of income and a 40k capital loss, you get taxed on 80k of income [AND those capital losses can only be used to offset capital gains, so if you only have regular income, then you would get taxed on 100k income during the year].

In theory, you might be able to claim the loss on disposition of shares as a business loss, under very very specific circumstances. In short, I would say those circumstances won't happen.

Therefore, it doesn't matter if you lose this ability, meaning giving up the ability to do it in the future isn't a big deal.

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The site here describes the difference between the two reporting methods.

https://www.taxtips.ca/personaltax/investing/taxtreatment/capitalorincome.htm

Here is a summary of some of the deciding factors, however it is a question of fact for the court to decide.

The combination of a number of the following factors may cause the gains or losses to be treated as income (100% taxable), not capital (50% taxable):

  • frequent transactions, extensive buying and selling of securities
  • short periods of ownership bullet some knowledge of or experience in the securities markets
  • security transactions form a part of the taxpayer's ordinary business
  • a substantial portion of the taxpayer's time is spent studying markets and investigating potential securities purchases
  • security purchases are financed primarily with margin or debt
  • the taxpayer has advertised or otherwise made it known that he is willing to purchase securities
  • securities purchased are speculative in nature or do not pay dividends

You would fill out T123 only if you wanted to declare short sales of Cdn securities as being capital gains or losses, which as of now are included at 50% on your taxes. IOW you pay half the tax on profits or claim half the losses. Normally short sales are considered to be an income transaction, read the linked IT-479 document.

Why is it hard? Up until recently every court case I've read involving section 39(4) of the income tax act was someone who lost some money trading stocks and tried to claim all of the losses as income so as to benefit doubly in money and also income losses can be applied against regular income, not just capital gains. They were all denied.

There was one recent case where the defendant proved he was carrying on a business in day-trading (albeit a lousy one) and was allowed the loss. So statistically it seems unlikely to be allowed unless you are actually carrying on a business (an adventure in the nature of trade as it's called). However, if it is a business you should be hoping to make money and obviously most people try to use capital gains so as to pay half the tax.

Note that submitting T123 only compels you to use a certain type of income/capital reporting. Nothing stops the government from deciding you actually are running a business and forcing you to use income reporting for your profits. So it seems like you should only fill out T123 for classifying Cdn. short sales as capital gains/losses ... or if you plan on losing money, in which case just stop.

edit: found the case but it wasn't so recent. https://www.canlii.org/en/ca/tcc/doc/2012/2012tcc417/2012tcc417.html?resultIndex=5

Mr. Mittal indicated that he had his own trading account as early as 2000, but maintained he actually started trading in 2004. He provided a business plan prepared in 2005 which is worth reproducing:

...

I find Mr. Mittal’s number of trades and number of days trading is evidence of someone engaged in an adventure. This factor alone however is not determinative.

...

Mr. Mittal’s uncontradicted evidence was that he put in approximately 25 hours per week on his trading activity

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  • Well-researched answer. Including a short section on the difference between losses on account of income vs losses on account of capital may help, as from the question it seems the OP is not very familiar with why this matters. – Grade 'Eh' Bacon Dec 19 '19 at 18:21

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