When trading profits are income

The temptation to have profits on securities transactions taxed as capital gains, rather than as business income (which is 100% taxable), is too great for some taxpayers to resist—even if they are clearly running a securities trading business.

Take this recent tax case involving Tony Wong (Wong v The Queen, 2013 TCC 130), which was decided in late April 2013. Wong was reassessed for the 2003 through 2008 taxation years, and the only issue in question was whether his gains and losses from selling securities were on account of income or capital.

Wong is a licensed real estate and insurance broker in Ontario who has traded securities since 1988. He completed levels I and II of the Canadian Securities Program and previously held a mutual funds license.

When he filed his income tax returns for the years in question he failed to report any of his capital gains. Then, in July 2008, he made a request under the Voluntary Disclosures Program (VDP) to include various unreported capital gains from the sale of his securities in each of his 2003 to 2007 tax returns.

His VDP request was denied by the Canada Revenue Agency.

Wong’s arguments

Wong argued that from 1996 to 2000, he incurred a capital loss from the sale of his securities, which, as of the end of 2002, totaled nearly $62,000 of available loss carry forwards.

So he didn’t report a gain or loss from his sale of securities when he filed his returns in those years because he knew he had that capital loss carried forward from prior years and he believed he had no taxes payable.

Wong’s position was that since CRA assessed his trading activity in those years on capital account, it was essentially precluded from considering his trading activity in the years now under review to be on his income account. He testified that his “investment style did not change from 1996 to the present and it is misleading for the CRA to reach different conclusions with respect to the same investor and the same investment account.”

Based on previous jurisprudence, the judge reviewed some of the factors that must be taken into account when determining whether a taxpayer’s gains from securities are on account of income or capital. Those factors are:

• the frequency of the transactions;
• the duration of the holdings;
• the intention to acquire the securities for resale at a profit;
• the nature and quantity of the securities; and
• the time spent on the activity.

But the judge emphasized that the critical factor in determining whether a taxpayer’s gains from securities are on account of income or capital is the intention of the taxpayer at the time he acquired the securities, which can be ascertained “from his entire course of conduct.”

To this end, the judge turned to Wong’s trading summaries for the five-year period under review, which showed he conducted more than 600 transactions.

The trades involved the purchase of more than 226,000 shares and the sale of more than 216,000 shares. The statements also showed Wong held most of the securities for a short period of time. Some were sold a few days after purchase, others the same day.

Wong said he was “not a professional investor”; invested in securities “by instinct”; “spent very little time on his activity with securities”; and “watched television to decide whether he would purchase or sell securities.” The judge found this to be “implausible” given the quantity of securities he traded and the duration of his holdings.

Judge’s conclusion

The judge concluded Wong’s profits on his sales of securities should be taxed as income. “[Wong] was engaged in trading in securities during the period[…]. This is a classic example of someone engaged in an adventure in the nature of trade,” he said.

The judge also said the fact that in prior years the CRA assessed Wong’s trading activity to be on his capital account doesn’t preclude the agency “from taking a different view of the matter in later years.”

Jamie Golombek

Tax & Estate

Managing Director, Tax and Estate Planning, CIBC Private Wealth Team Jamie Golombek is Managing Director, Tax and Estate Planning with CIBC in Toronto. As a member of the CIBC Private Wealth team, Jamie works closely with advisors from across CIBC to support their clients and deliver integrated financial planning and strong advisory solutions. He joined the firm in 2008 after 12 years with a global investment company, where he was involved in both internal and external consulting on all areas of taxation and estate planning. Jamie has also worked for Deloitte as a tax specialist in the Toronto office, where he specialized in both personal and corporate tax planning. Jamie is quoted frequently in the national media as an expert on taxation. He writes a weekly column called “Tax Expert,” in the National Post, has appeared as a guest on BNN, CTV News, and The National, and for several years was a regular personal finance guest on The Marilyn Denis Show. He received his B.Com. from McGill University, earned his CPA designation in Ontario and qualified as a US CPA in Illinois. He has also obtained his Certified Financial Planning (CFP) and Chartered Life Underwriting (CLU) designations. In 2023, Jamie was named a CPA Ontario Fellow. The FCPA is the highest distinction that can be bestowed upon a CPA who brings distinction to themselves and to their profession through leadership and achievement in their professional, community or personal lives. Jamie is a past chair of the Investment Funds Institute of Canada’s Tax Working Group. He is also a member of CPA Ontario, the Illinois CPA Society, the Estate Planning Council of Toronto, the Canadian Tax Foundation and the Society of Trust and Estate Practitioners. For nearly two decades, Jamie taught an MBA course in Personal Finance at the Schulich School of Business at York University in Toronto.