As a trader based in Canada for more than a decade, it took me some time to get my head around the tax rules and regulations that apply to Canadian Forex traders, CFD traders, and futures traders. A major issue is that some tax rules seem open to interpretation. I also struggled to find all the essential information in a single place.
To address these challenges, let’s gather the key information to navigate Canadian Forex taxes and regulations.
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How Forex Trading Profits Are Taxed in Canada
There are two ways for traders to classify their trading income for tax purposes:
- Capital Gains (50% of Income Tax)—the Canada Revenue Agency applies this when trading is a hobby and not a primary source of income.
- Income Tax— the Canada Revenue Agency applies this when it views your trading as a business or job.
The Canada Revenue Agency (CRA) determines whether you can classify your trading as capital gains or income using four criteria: how often you trade, how long you hold trades, how much time you spend trading, and how much money you make.
The CRA’s rules will decide for you—you do not get to choose whether your trading should be taxed as Capital Gains Tax or Income Tax.
Basics of Capital Gains Tax in Canada
“Capital gains” refers to the money made buying and selling assets or financial instruments.
There are three points to understand about Capital Gains Tax, each of which I will explore:
- Capital Gains Tax is 50% of the marginal income tax rate.
- The Canada Revenue Agency accepts trading income as Capital Gains if it determines the taxpayer does not conduct trading as a “business.” Otherwise, the CRA will apply income tax to trading income (i.e., double the capital gains tax rate).
- Taxpayers cannot write off expenses when filing trading income as capital gains.
When Does Capital Gains Tax Apply Vs. Income Tax?
Capital Gains Tax applies to taxpayers who trade as a hobby, not a business. Unfortunately, the Canada Revenue Agency (CRA) applies seemingly subjective rules to determine the difference between hobby trading vs. trading as a business. It uses four evaluation criteria:
- How often do I trade?
- How long do I hold trades?
- How much time do I spend trading?
- How much money do I make?
The CRA does not specify objective levels for each area to establish when a trader crosses the threshold from Capital Gains Tax to Income Tax. For example, it does not say, “Two trades a week is a hobby, but two trades a day constitutes trading as a business,” etc.
However, it is possible to derive some general guidelines. Most tax specialists would agree that if I sit at my computer once a week or once a month to look at trades and make a handful of trades a month, I will probably be safe to claim trading profits as Capital Gains.
Instead, if I trade more regularly especially daily, holding trades for short periods and day trading, there’s a good chance the CRA will determine I should pay income tax on my gains. The same is true if I spend a lot of time trading or make a large amount of money trading compared to my other income sources. My rule of thumb is that if I treat trading as a job or a business, it is probably a business for tax purposes, and income tax (not capital gains tax) will apply.
A Capital Gains Tax Example
Canada calculates its Capital Gains Tax (CGT) as 50% of the marginal Federal and Provincial income tax levels. Therefore, capital gains tax is half the tax I would pay if I applied income tax to my trading.
Let’s take the example of an Ontario tax resident who earns $60,000 in employment income plus $20,000 in trading profits in 2024.
Federal marginal tax rate for earnings from $60,000 to $80,000 in 2024: 20.5%
Ontario marginal tax rate for earnings from $60,000 to $80,000 in 2024: 9.15%
This gives a combined Federal and Provincial marginal tax rate of 20.5% + 9.15% = 29.65%.
The effective Capital Gains Tax is 50% of the marginal Income Tax, i.e., 29.65% x 0.5 = 14.825%.
Therefore, the calculation for the tax payable is:
$20,000 x 14.825% = $2,965.
The Canada Revenue Agency adjusts the Federal and Provincial income tax thresholds for inflation each year using Statistics Canada's Consumer Price Index (CPI) data. The current income tax rates for individuals can be found here.
Capital Losses Can Offset Capital Gains for Tax Purposes
For example, if I make $24,000 worth of profitable trades and $4,000 of losing trades, I pay Capital Gains Tax on $20,000.
I Cannot Write Off Expenses with Capital Gains Taxes
The most significant disadvantage of filing trading profits as Capital Gains rather than Income is that I cannot write off expenses related to trading, such as software, subscriptions, internet access, computer equipment, courses, etc. Income Tax filing allows taxpayers to write off relevant expenses.
In most circumstances, qualifying for Capital Gains Tax is more advantageous than Income Tax for trading income.
How to Avoid Tax on Forex Trading in Canada
It is illegal in Canada not to declare income or capital gains for tax purposes. The Canada Revenue Agency can collect unpaid taxes, e.g., by garnishing wages, seizing bank accounts, or placing property liens. In severe cases, it will pursue legal actions, including fines and imprisonment.
However, there are legal strategies to reduce tax exposure.
Tax Planning Strategies for Forex Traders
- Consider setting up a corporation. Corporate tax rates are generally much lower than income tax rates and even capital gains tax rates, depending on the amount of trading profits. There are expenses involved in having a corporation, such as using an accountant or lawyer to set it up and submit the annual filings to the CRA. Some exchanges even charge more for data feeds for corporate accounts. However, a corporation may be more tax advantageous if you consistently earn six figures from trading and are near the top of the income tax brackets.
- Don’t forget the expense write-offs if you pay income tax on trading profits. Deductible expenses can include items such as part of your mortgage interest or rent and the usual costs related to trading: data feeds, platform fees, computer upgrades, trading courses, internet, etc. These can all substantially reduce your tax bill.
- Consider using an RRSP to defer income taxes. Registered Retirement Savings Plans, or RRSPs, are tax-deductible savings accounts. Any Canadian who has filed taxes in previous years will have “RRSP room,” meaning they can contribute up to a certain level to RRSPs based on previous years’ income and receive an income tax deduction.
- Donate to a registered charity and receive a tax deduction. Registered Canadian charities automatically give tax receipts to donors, allowing a tax credit for a portion of the donation. Some charities also accept “in-kind” stock transfers, meaning you can transfer stock ownership to the charity as a donation and not trigger a capital gain. You receive a tax receipt for the current fair market value, i.e., the value of the stock on the date of transfer.
- Some assets can be traded in Tax-Free Savings Accounts, Registered Retirement Savings Plans, and other “registered accounts.” For example, Tax-Free Savings Accounts (TFSAs) allow for tax-free growth of assets. The Canada Revenue Agency lets individuals trade equities and ETFs in these accounts if it does not view the trading as an active business. Forex and futures trading is prohibited in registered accounts. Find the full rules and list of qualified investments here.
Forex Regulations in Canada
Most market professionals consider Canada to have one of the best regulatory frameworks for retail trading to protect against fraud and malpractice. Here are some key things to know:
- The Canadian Investment Regulatory Organization (CIRO), formerly IIROC, regulates retail brokers.
- CIRO-regulated brokers must segregate client funds from their operations. This is one of the most critical protections of client money.
- CIRO-regulated brokers have restricted leverage on Forex trading for retail clients, varying from 33:1 for majors and 10:1 for exotics. CIRO periodically reviews maximum leverage limits, so check with your broker.
- Canadian rules permit residents to use non-Canadian regulated brokers. I recommend sticking to well-regulated jurisdictions like the UK, USA, or Australia.
The best Forex brokers in Canada are properly registered with CIRO and will confirm this on their homepage.
Bottom Line
All Canadians must pay either Capital Gains Tax (calculated at 50% of marginal income tax) or full income tax on trading gains. Capital Gains Tax applies when the Canada Revenue Agency does not consider your trading a business activity. The CRA uses four criteria to determine whether trading is a business activity: 1. Frequent trading, 2. Short-term trading, 3. The primary source of income is trading, or 4. The person spends much of their time trading. When trading is considered a business activity, Canadians pay tax at the total Federal and Provincial marginal income tax rate. Income tax filing allows taxpayers to write off related expenses, and Capital Gains Tax does not allow expense deductions. However, capital gains tax will be more advantageous for most people because it is at half the income tax rate. For traders that earn substantial six-figure profits annually, setting up a corporation may be the most tax-advantaged route.
