Forex Trading: Income or Capital Gain Tax in Canada?
I’ve always known that foreign exchange trading is treated as capital gain tax in Canada. But just to be sure before filing my taxes soon, I’ve decided to double check the facts from Canada Revenue Agency. As you know, the difference between income tax and capital gain tax is substantial. Income tax is taxed at your marginal tax rate. Whereas capital gain tax is a generous half of your marginal tax rate. That works out to a 10% to 20% difference.
Taxes in Canada is generally simple to do. The problem though, is sifting through the cacophony of information within the Canada Revenue Agency to find out the applicable rules. I’ve copy and pasted a couple of relevant excerpts from the 2010 CRA Income Tax Interpretation Bulletin for the record.
Basically, forex trading can be treated as either income or capital gain tax in Canada (surprise). According to IT-95R Foreign exchange gains and losses.
2. Where it can be determined that a gain or loss on foreign exchange arose as a direct consequence of the purchase or sale of goods abroad, or the rendering of services abroad, and such goods or services are used in the business operations of the taxpayer, such gain or loss is brought into income account. If, on the other hand, it can be determined that a gain or loss on foreign exchange arose as a direct consequence of the purchase or sale of capital assets, this gain or loss is either a capital gain or capital loss, as the case may be. Generally, the nature of a foreign exchange gain or loss is not affected by the length of time between the date the property is acquired (or disposed of) and the date upon which payment (or receipt) is effected.
As you can see, it is very vague. That’s why forex trading can be considered income or capital gain tax. It is up to you and your accountant to figure out which works for you.
A noteworthy point in the above excerpt is that the holding period is not taken into account. So there’s no 30-day rule like in the states whereby frequent trading would miss out the capital loss credit if they re-purchase the same asset within 30-day of disposal.
Update: Looks like I have misconstrued the above article with regard to capital loss. As Olga pointed out in the comments, Chapter 5 of T4037 defines Superficial Loss. In which if you repurchase your property (e.g. stock) within 30-days after a sale at a loss, then that initial loss cannot be deducted as a capital loss. More about the Superficial Loss rules in Canada can be found at WhereDoesAllMyMoneyGo.com.
Further down the page in IT-95R, we have the following bullet.
6. A taxpayer who has transactions in foreign currency or foreign currency futures that do not form part of business operations, or are merely the result of sundry dispositions of foreign currency by an individual, will be accorded by the Department the same treatment as that of a “speculator” in commodity futures see 7 and 8 or IT-346R. However, if such a taxpayer has special “Inside” information concerning foreign exchange, he will be required to report his gains and losses on income account.
IT-346R Commodity Futures and Certain Commodities explains the tax treatment of speculation in the commodity markets.
7. As a general rule, it is acceptable for speculators to report all their gains and losses from transactions in commodity futures or in commodities as capital gains and losses with the result that only one-half the gain is taxable, and one-half the loss is allowable subject to certain restrictions, (hereinafter called “capital treatment”) provided such reporting is followed consistently from year to year.
So there, we have it. Amateur forex traders, such as myself, can report our forex trading gain/loss as capital gains and losses. The reason being that forex trading isn’t part of my business operation because I have another primary source of income (e.g. salary from another job).
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good info. thank you.
do not agree with
…So there’s no 30-day rule like in the states whereby frequent trading would miss out the capital loss credit if they re-purchase the same asset within 30-day of disposal…
see CRA’s T4037 Capital Gains 2009 page 35
Thank you for pointing out my error! I have corrected the post with the information.
if we dont withdraw the profit from account ,
do we still have to pay the tax ???
Hi AJ, we are legally obligated to report all our profits and losses. Unfortunately, a forex account doesn’t get a tax shelter status.
I am an amateur forex trader and have conducted hundreds of trades through the year. How do I first correctly calculate my gain or loss on my account if my account is in USD and where exactly do I report it? Can I simply add up all the transactions and then convert back the gain or loss of the total to Can$ at the exchange rate at Dec 31 or do I need to convert each transaction to Can$ at the exchange rate of the moment of the transaction?
Is the place to report the gain/loss on schedule 3 line 151 or 153 but I just want to make sure that is the correct place.
According to T4037, pg. 20 on Foreign Exchange gain/loss, you can put the net gain/loss on line 151 and 153 of T1 Schedule 3. You can convert your USD net to CAD with the single exchange rate given by CRA instead of backtracking the rate at the date of each trade.
Just a reminder, always keep detailed records of each and every trade in case there’s an audit. Some broker discard your trade record after a couple of years. So I like to keep at least another copy of my data.
As always, I recommend that you check with a tax expert as I am not qualified to give tax advice.
Hi
I start trading forex Jan.,2010, I start with mini micro lot. One lot
only US$1000.But I trade about 400 lot in whole year,so thats make about
US$400,000 open position and close position. I trade major and all kind
cross rate currencies. If I have to calculate all 400 lots with various
currencies how much total buy and sell, its imposible. but end of year
I lost about US$490.00. How I can show this 1n canadian income tax.
Thank you very much for help
chee, according to T4037, you can show the net loss on Schedule 3.
Hi Paul
Thank you very much. I need more information for schedule 3
I am doing this first time. So we show forex trading
in line 151 and 153. But there is column, Proceeds of disposition
Adjusted cost base, Outlays and Expenses and last one Gain and
Loss.I have show net loss in line 151,that be line up with
Proceeds of disposition and then same net loss in line 153
that be line up with Gain and loss or net loss just in line 153
under the gain and loss column.Or there is any otherway.
And column Name of Issuer, I have to say Foreign Exchange .
Thanks
I think you forgot to mention that in IT-346 bulletin it states the following,
8. If a speculator prefers to use the income treatment in reporting gains and losses in commodity futures or commodities, it may be done provided this reporting practice is followed consistently from year to year. If income treatment has been used by a speculator in 1976 or a subsequent taxation year, the Department will not permit a change in the basis of reporting. *Interpretation Bulletin CPP-3 discusses the effect of the income treatment and capital treatment on self-employed earnings for the purposes of the Canada Pension Plan.
so just like you said FOREX can be treated as a Capital or Income gains/losses. You just have to be consistent on your filing, exactly what CRA consultant told me….if you filed it as business in the very beginning yo can’t change it to Capital Gains.
Hello. Do I have to pay taxes if I live and trade in Canada, but my AD in Europe?
For exact calculations of Product of Disposition & Capital Gains on Forex account, Non-registered accounts (US-CDN) & Registered accounts (US-CDN), for Canada, use my Excel spreadsheet (free)…
Thanx for replay, Lem. AD is for authorized dealer. My dealer in Europe and bank account is in UK. So, do I have to pay taxes? Thanx in advance for replay.