Can I Open a Corporation for Day Trading in Canada?

As a CPA in Ottawa, a lot of people ask me whether they can open a corporation for day trading to save on taxes in Canada. The answer is: It depends on the facts of your situation, CRA would like at things like - do you trade daily ? Do you have a professional trading licence ? Are you an expert in the industry ? Do you operate like a daily business ? CRA considers all of these things when assessing your trading activity.

When Is Day Trading Considered a Business?

The CRA looks at how you trade to decide if it’s a business or just investing. Accordingly, it is a question of fact whether a corporation that is a trader in securities carries on an active business

• (a) frequency of transaction—a history of extensive buying and selling of securities or a quick turnover,
• (b) period of ownership—securities are usually owned for only a short period of time,
• (c) knowledge of the securities market—the taxpayer has some knowledge of or experience in the securities markets,
• (d) security transactions form a part of the taxpayer's ordinary business,
• (e) time spent—a substantial part of the taxpayer's time is spent studying the securities market and investigating potential purchases,
• (f) financing—security purchases are financed primarily on margin or some form of debt,
• (g) advertising—the taxpayer has advertised or otherwise made it known that he is willing to purchase securities, and
• (h) in the case of shares, their nature—normally speculative in nature or of a non-dividend type.

Then, CRA will likely treat your trading as a business, meaning your profits will be taxed as business income instead of capital gains. If that happens, you can’t elect under section 39(4) to report your gains as capital gains.

Can a Trading Corporation Get the Small Business Deduction?

The answer is "Maybe". The CRA allows corporations to claim the Small Business Deduction (SBD) if they run an active business. If your corporation is actively trading stocks as its main activity, it could qualify.

But if your corporation mostly earns dividends or passive investment income, CRA might classify it as a specified investment business, which does not qualify for the SBD.

How much tax would an incorporated day trader pay?

In Ontario, if your corporate qualifies for the SBD, then you'd only pay 12.2% on your profits, for whatever income your company earned as "active business income". You should be careful and avoid assuming you qualify. You most likely need real analysis from a CPA or tax lawyer before making such conclusions.

The CRA doesn’t automatically classify all traders as businesses. But if your trading activity looks more like a business operation than an investment, you could be taxed as a business rather than as an investor.

CRA's IT-479R states that to determine if someone is carrying on a trading business, they look at:

• Frequency of trades – Are you trading daily or just a few times a year?
• Holding periods – Are you flipping stocks quickly or holding for long-term gains?
• Time spent – Are you actively managing your trades like a full-time job?
• Knowledge and expertise – Are you operating like a professional trader?

If you’re trading frequently with the intent of making short-term profits, CRA could classify your activity as a business. That means your trading income would be taxed as business income instead of capital gains.

CRA also makes it clear in interpretation 2010-0381231E5 that traders who operate like a business cannot elect under section 39(4) to treat their gains as capital gains.

Should You Incorporate for Day Trading?

Some pros of incorporating:

• Lower tax rates if you qualify for the SBD
• Potential to deduct trading-related expenses
• Keeping profits in the corporation to defer personal tax

Some downsides:

• If CRA says your corporation is a specified investment business, you lose the SBD benefit
• Business losses in a corporation can’t offset your personal income
• You don’t get capital gains tax advantages

Final Thoughts

If you’re thinking about incorporating for day trading, don’t just assume it will save you taxes. CRA looks at how you trade, not just where you trade from. If you’re not careful, you could end up with higher taxes, not lower.

For more information, consult Canada.ca and if you’re looking for a CPA in Ottawa, please don’t hesitate to reach out.

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References and Resources:

1. CRA confirms that a stock trading business can be ABI; interpretation external, 2010-0381231E5
2. https://www.reddit.com/r/cantax/comments/k840ih/options_trading_capital_gains_or_business_income/
3. https://taxinterpretations.com/cra/severed-letters/2019-0826051e5

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This is not legally binding tax advice. This is educational analysis. Say hello if you need help.

hello@taxesmadesimple.ca

WhatsApp - 613.600.4194

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