Trading TAXES in Canada - Sole proprietorship vs Incorporation (Tax deductions)

All the profits below $500,000 are taxed at only 11% .

Yes , you heard it right ?

1 1% .

So did you make a lot of money from day trading last year ?

You did ?

Ok , great .

Guess what you'll be getting in the beginning of the new year ?

A Lamborghini .

No , heavy tax .

That's right .

While a lot of traders are living the dream banking , Lamborghini money and YOLO calls , not a lot of people actually take into consideration how much they need to pay for taxes because guess what ?

The Cr a Canadian revenue Agency wants a piece of the pie too because sharing is caring , right ?

I've been a day trader for more than seven years now and I've learned so much along the way about optimizing tax deductions and saving money .

So that's why I'm making this video to help you better understand day trade in taxes in Canada and save more of your hard earned money .

I'll be covering some key topics such as business structures and tax deductibles and tax saving tips for active traders .

A lot of time research and of course , sharing from my own personal experience as a full time day trader went into this video .

So if you appreciate my efforts , please make sure to drop a like at the bottom of the video .

That'll tell me to make more videos like these in the future .

Like we mentioned earlier , there are two types of incomes that we are concerned about as active traders , capital gains and business income .

If you made $100,000 from investing , let's say you bought Tesla stock many years years ago .

Pres split and you held the position for more than three years and finally cashed out in 2021 for a handsome $100,000 profit , then that profit should be considered capital gains .

So you'd only need to pay tax on 50,000 of that income .

Essentially 50% of your profits are tax free .

However , if you were day trading Tesla stock instead , meaning you make multiple trades a week and some you hold the stock position for only a few minutes or a few hours .

Then that same $100,000 profit will be very likely to be considered as business income .

So that entire $100,000 is taxable at your full marginal tax rate .

And yes , this tax bill is definitely going to be a lot higher than you'd expect .

So we got the bad news out of the way , but don't worry , it gets so much better .

The sweet , sweet thing about filing your trading profit as business income are the tax deductions .

Basically , this means saving more money and keeping more profit in your pocket .

This brings us to the first key topic regarding day trading .

Taxes in Canada business structures and tax deductibles for day traders .

But before we go there , here's a quick mandatory disclaimer .

I am not a CPA nor financial advisor .

I don't know anything about taxes .

All I do is , hm .

Socks , yellow calls and Bitcoin .

This video is for informational purposes only what works for me personally here may not apply to you .

All right , with that aside , the two most applicable business structures for day traders are sole proprietorship , basically self-employment and incorporation .

If you just realize after watching the first part of this video that you should be reporting your profit as business income , then you will most likely be filing a sole proprietorship .

Sole proprietorship is the simplest business structure in Canada .

It's not that complicated .

You don't need a lawyer or even set up a company name .

It just means you are self employed , you own your own business of trading and you are the only employee .

For example , if my ex-husband , Mike bag holder , it's about drive .

It's about is filing for day trading profit this year .

His sole proprietorship is just under his personal name , Mike back holder .

That's it easy .

Peasy .

Lemon short squeezy for most traders in Canada , you'll be filing your day trading profit .

A self employment income and you'll pay the same personal tax rates just like all the normal people working 9 to 5 .

However , the big difference is that since you own your own business of day trading or swing trading , you now have a variety of deductions that are not available to regular 9 to 5 employees .

As traders filing a sole proprietorship , you get to write off your trading commissions platform fees , locate fees , scanner fees or even day trading education programs .

And since you most likely trade from home , just like I do , then you can write off part of your utility bills , mortgage interest , internet and the phone bills and the list just goes on and on really quick .

Here .

Let me show you how to calculate how much you can write off for home expenses .

If you live in a 1000 square feet home and your home office for trading occupies 200 square feet , that means you can write off 1/5 of your mortgage interest only the interest , not the principal and the maintenance fees and any home repairs essentially deduct all the expenses you spent to generate your business income .

So if you made $100,000 in 2021 and spent $20,000 on business expenses , then that means only 80,000 of the profit is taxable income .

I made a video on this channel going over all of my day trading expenses and the total comes out to be more than $79,000 a year .

So all of these are tax tax deductions for my personal trading income .

Again , make sure to consult with a tax professional about this .

If you are indeed making a substantial income from day trading or swing trading , it's very much worth spending the 3 to $500 to have a CPA do all the proper calculations and write offs for you .

This is even more important if you are considering the next business structure for even more tax savings and that is incorporation .

There are many benefits of why people choose to incorporate their business .

But the one benefit that applies to us traders is the small business tax rate .

And here in British Columbia where I live , all the profits below $500,000 are taxed at only 11% .

Yes , you heard it right .

1 1% .

Also , that's the grade I got for my math exam .

Essentially incorporating your trading business means you the owner becomes a separate legal entity from your business and the two entities are taxed separately .

Now , we're going to dive into all the nitty gritty details that could save you a lot of money .

These are all the lessons I've learned reporting day trading taxes over the years .

Many mistakes in the past have cost me a lot of money .

So if you're learning from this video , remember to drop a like and subscribe .

It's easy and free to do .

Unlike paying for your taxes , share this with another friend and pay it forward .

I would really appreciate it under this corporate structure .

Your trading profit under $500,000 is taxed at 11% in BC and anything above $500,000 is taxed at 26% .

And you , the owner of this business can choose to pay yourself a salary from your trading corporation and only that salary is taxed at your personal tax rate .

Ok .

Bear with me .

Let's dive into an example here .

Let's say my ex-husband , my bag holder .

It's about , it's about power .

We made $400,000 in trading last year and had $50,000 in expenses .

If he was filing a sole proprietor , he would pay $148,000 in taxes , which is 40 0.82% tax rate .

His take home would only be $202,000 .

0 my God , just thinking about this makes me want to cry .

However , if Mike had been incorporated as Bag holder Trading limited , he can still write off that 50,000 in expenses .

But now the corporation only needs to pay 11% tax rate which equates to only $38,000 to the cr A .

And the company gets to keep 311,000 in profits .

I mean , 38,000 versus 148,000 in taxes .

That's a pretty big difference .

But wait , don't forget that Mike Bag Holder himself needs to use the trade in profit to pay the bills too .

Since he owns bag holder trading limited , he can pay himself $90,000 in salary and he would only need to pay $18,000 in personal taxes to the CR A and he gets to keep $67,000 in his personal bank account .

The rest of the money , he does not draw out a salary .

Stays in his corporation B holder trading limited until he chooses to draw out more next year .

Or maybe he just reinvest that capital into his trading account .

So as you can see , this is the reason many high income traders may be interested in incorporating their trading business .

You essentially could keep more of those profits , but just in a separate entity that you fully control , the tax advantages are quite astonishing .

Now hold up before all of you watching this video , just hop on to your Lamborghinis and straight to your closest lawyer's office .

Make sure to call me first .

Just kidding .

I have to explain .

Incorporating a day trading business is not for everyone .

The biggest disadvantage is the cost .

Since you are trading now as an incorporated company , you will need to open a corporate trading account with your broker and for most brokers and platforms , that means higher monthly data fees .

Just a quick example , if a sole proprietorship day trader subscribes to an interactive brokers market data , it will be around 20 to $30 a month .

However , as a corporate trader , that means the same subscription is now going to be around 300 to $500 a month .

Big difference here .

In addition , since you're now running a corporation , you have to hire corporate accountant , which could mean 3 to $5000 each year .

Potentially lawyers too slack on another $1000 and other super annoying things like record keeping and um doing math .

So , in my opinion , once again , please talk to your own CPA and assess your own situation here .

I think it's only worth incorporating your trading business once you are consistently making six figures and you are near the top of the tax brackets .

Otherwise filing a sole proprietorship will be more than just fine and you still get the benefit of deducting all the trading expenses .

Again , I think it's only worth incorporating your trading business once you're consistently making six figures .

And another aspect many people don't consider is real estate purchasing for your own residents with inflation rising after 2020 .

1 of the best places for traders to put their trading profit is in real estate properties .

Many are upgrading their whole homes to a bigger space so they can trade and enjoy working from home .

And this is the reason I've done a substantial of day trading as my personal income .

Instead of incorporation , I've been planning to purchase a new home to live in for a few years and to qualify for low interest , conventional mortgage loans .

A self employee traders , we will need to have at least two years of consistent personal income .

Yes , it would have to be personal income that's taxed as a sole proprietor at your full marginal tax rate because you cannot use your corporate funds to purchase a home for yourself to live in .

The cr A would definitely come after your , if you are trading under a corporation and looking to purchase your own home in Vancouver or Toronto , you would probably need to take out at least $100,000 in salary from your business for a down payment .

That means your business will be taxed on a corporate tax rate and you again would have to pay the personal tax rate on that salary .

I don't know about you , but I don't want to pay any more taxes than I have to legally .

Of course , the CR A is always watching everyone pay your taxes .

Ok .

Make sure to speak to a tax professional and assess your current and future financial needs and goals .

All of these little nuances should be taken into consideration when deciding whether sole proprietorship or incorporation is right for your trading business .

If you are worried about taxes , that means you've made some money from trading .

That's a good thing if you are still on sure whether your profits should be capital gains or business income .

Check out this other video I've made previously on that topic if you enjoyed this video , please remember to drop a like and subscribe if you're interested in learning more of my day trading strategies , especially risk management .

Feel free to check out the Humble Trader Academy on my website .

Thank you guys so much for watching .

As always , I'm the humble trader and I'll see you guys next time .