If you sell a security, such as a share, bond, or mutual fund, and realize a gain, the gain will be a capital gain unless you are found to be in the business of selling the security. If you are in the business, the gain will be considered business income.
The difference is significant. A capital gain is only one-half included in income as a taxable capital gain, whereas business income is fully included. On the flip side, a capital loss is only one-half deductible and only against taxable capital gains, whereas a business loss is fully deductible against all sources of income.
If you would like to ensure capital gains treatment for gains on sale of Canadian securities, you can make an election in your tax return for a year. If you do so, your gains from the sale of Canadian securities for that year and all subsequent years will be capital gains. The downside is that all of your losses will be capital losses, which are not as beneficial from a tax perspective compared to business losses.
For these purposes, a “Canadian security” includes a share in a corporation resident in Canada, a unit in a Canadian mutual fund, and bonds and other debt instruments issued by person residents in Canada. Obviously, it does not include foreign securities.
The election is not available for the following persons:
- a trader or dealer in securities,
- a financial institution such as a bank or trust company,
- a company whose principal business is the lending of money or the purchasing of debt obligations or a combination thereof, or
- a non-resident person.