How is Prop Trading taxed in Canada?

A

afajtr

Hi, I've been prop trading for about 9 years now. I might be moving to Canada (for citizenship reasons) at the end of the year. One of my concerns is how is this activity taxed in Canada.

Someone told me that assuming the trader is on the highest bracket, which I think stands at 46% right now, prop trading will fall into the "capital gains" field, so you would only be taxed on 50% of your yearly gains. So you will end up at a 23% marginal rate, although you would not be entitled to any deductions.

If anyone knows about this topic I will appreciate your help. This is assuming the trader trades for a US prop firm but living in Canada. Also, is there any difference if you receive a K1 or 1099 from that US firm? Is stock trading taxed in a different manner that futures trading as in the US?

Thanks a lot for any help.
 
It is taxed exactly the same as a personal business or liberal profession.

The revenues are taxed as income, not capital gains. You can deduct expenses from that amount.

Getting an INC. is probably a good idea if you don't need all the money that you earn in a given year. That way, you get way more flexibility in your income planification (salary vs dividends vs combo of both) and you get to defer taxes in your company much like a RRSP.
 
Agreed.

Revenue Canada looks at the nature and intention of the trading. Prop trading is inherently short term (ie, under 30 days) in nature, and as such they treat it as business income.

That said, there are some significant benefits to incorporating and running the income through the company as the previous posted mentioned, which ultimately relates to writing off as much expenses against income as possible.
 
Thanks for the insights.

What type of things can you deduct as an expense: car lease, rent, utility bills, internet, seminars, mortgage interest etc?

For what I understand small business corporations are taxed around 20%, but when you receive a payment (salary) from your own company, you will get taxed again on that salary, right? If you decide to get paid as dividend instead of a salary would you be much better off?

In terms of provinces, which ones offer the lowest tax advantages or which ones are definately the ones to avoid?

Thanks for all the help
 
Quote from afajtr:

Thanks for the insights.

What type of things can you deduct as an expense: car lease, rent, utility bills, internet, seminars, mortgage interest etc?

For what I understand small business corporations are taxed around 20%, but when you receive a payment (salary) from your own company, you will get taxed again on that salary, right? If you decide to get paid as dividend instead of a salary would you be much better off?

In terms of provinces, which ones offer the lowest tax advantages or which ones are definately the ones to avoid?

Thanks for all the help
More...

You can claim a part of your mortgage I think, equal to the amount of sq. footage you are using for your trading office. Same with a portion of the utils.

You can claim internet, software and computer hardware in full. Alberta may be the lowest out of all the provinces, we also don't have a provincial sales tax, only a government sales tax (5%).

Ones to avoid would be British Columbia (eve though I love it). Not sure on the provincial taxes, but everything in BC is more expensive (BC=Bring Cash). It is beautiful, but you need to decide if it's worth the extra cash...
 
I was a tax accountant in a large accounting firm in Canada eons ago. My comments might be out of date. At the time, private corporations got the small business deduction on active business income earned in Canada. The small business deduction lowered the approximately 50% federal tax rate to 25%. There was something called integration. That means that when the income was paid out of the corporation, there was a dividend tax credit which resulted in not having to pay any more tax on the income.

You haven't mentioned if you presently trade commodities or futures. Sixty percent of any net gain on these is generally taxed in the U.S. as a capital gain. If you do trade these, the tax cost of moving to Canada may be prohibitive.
 
accutrader, thanks for the info, I presently trade only equities. What would be the difference between trading equities in the US and Canada taxwise??

What is the current capital gains tax in the US? So, you mean that if in any given year I make lets say 200k trading SP eminis and other futures (bonds, oil, gold, euro futures etc) then I will only pay capital gain tax on 120k and the other 80k (or 40%) is totally exempt of any taxation? SO, this figure won't apply in canada i will end losing that 40% exemption?

thanks a lot for your explanation and excuse my ignorance on the topic.
 
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