[Dave]

I did a few short sales this year and from what I read, CRA wants me to report my gains or losses as income instead of capital.

However, I was wondering if I can use the T123 form (Election of disposition of Canadian securities) and clain all the proceeds as cap gains / losses. Does anyone have any experience with this ?

Thanks,
Dave

 

[Max]

Dave, I don't have any experience with the tax consequences of shorting stock, so I can't really help you, but logically it just doesn't make sense for this to be taxed as normal/interest investment income.

Look closer and I am very confident you will find that this is a capital gain and not investment income.

 

[ghostryder]

Dave, I don't have any experience with the tax consequences of shorting stock, so I can't really help you, but logically it just doesn't make sense for this to be taxed as normal/interest investment income.

Look closer and I am very confident you will find that this is a capital gain and not investment income.

Look closer and I think you will find you are wrong.

http://www.cra-arc.gc.ca/E/pub/tp/it479r/it479r-e.html

18. The gain or loss on the "short sale" of shares is considered to be on income account.

 

[avrex]

Back in the mid-2000s, I performed a short-sale. It is the only short-sale that I have ever performed. I performed it on a US stock in my non-registered account.
I was stubborn in my belief that the stock would fall. The stock kept rising and I continued throwing more cash against the margin calls. The end result was that I lost thousands of dollars when I finally settled the trade.

I decided not to report the loss in that tax year. My plan was to carry forward that captial loss to a future tax year when I sold one of my big capital gains stock. In that way, I would have my big captial loss offset my big capital gain.

However, now I've stumbled across this thread.
Based on the link from Canada Revenue Agency, http://www.cra-arc.gc.ca/E/pub/tp/it479r/it479r-e.html
it looks like they consider this to be income loss and not a capital loss.

This seems so counter-intuitive when most of our investing actions are considered capital gains or losses.

Has anybody else performed short-sales?
Did you report the gain/loss as income or as a capital gain/loss?

 

[Mockingbird]

I did a few short sales this year and from what I read, CRA wants me to report my gains or losses as income instead of capital.

However, I was wondering if I can use the T123 form (Election of disposition of Canadian securities) and clain all the proceeds as cap gains / losses. Does anyone have any experience with this ?

Thanks,
Dave

Ghostryder is correct. Short sales are treated as straight income.

Also, here's a detailed information from the Tax Resources Blog.

MB

 

[olsido]

Ghostryder is correct. Short sales are treated as straight income.

Also, here's a detailed information from the Tax Resources Blog.

MB

Actually I think you guys got it wrong... ;-)

From the CRA link http://www.cra-arc.gc.ca/E/pub/tp/it479r/it479r-e.html, section 6 says 'The election under subsection 39(4) is applicable only to "Canadian securities".' And then: 'A Canadian security includes such a security that is sold short.'

 

[CPA Candidate]

By definition a short sale is not an investment. Trading is treated as income, long or short.

 

[james4beach]

This one is not a simple matter. Friends and I have asked numerous accountants over the years, and also asked the CRA. We've never gotten a straight answer one way or the other. Don't bother phoning the CRA about this; they have no idea.

I have been reporting my short positions as capital gain/loss.

 

[el oro]

From the CRA link and already posted above... 18. The gain or loss on the "short sale" of shares is considered to be on income account.

It doesn't get much simpler, especially when interpreting tax guidelines.

 

[james4beach]

I thought there were various updates/notes that muddied the issue

 

[CPA Candidate]

I thought there were various updates/notes that muddied the issue

By the very nature of the act of selling short, it could never be capital. It's not even close.

 

[james4beach]

OK, so what is the proper way to report this then? For a personal tax return where I don't run a trading business.

How do you report the income from short selling on your tax return? How do you report a negative income?

In the negative income case, does it simply subtract from my gross income?

Which boxes do these go into? I've asked various accountants and the CRA, and nobody knows the answer. But if you know, I'd love to hear

 

[james4beach]

I thought there were various updates/notes that muddied the issue

By the very nature of the act of selling short, it could never be capital. It's not even close.

I'm not sure you're right about that. Here is a CRA notice on the topic
http://www.cra-arc.gc.ca/E/pub/tp/it479r/it479r-e.html

OK, so what does the CRA notice say regarding short sales? Read that notice in order from top to bottom.

2. Says that section under 39(4) the taxpayer has a one time election to treat transactions on the capital account, this thing:
http://www.cra-arc.gc.ca/E/pbg/tf/t123/t123-07e.pdf

6. Says this election only applies to "Canadian securities". Then there's the critical sentence "A Canadian security includes such a security that is sold short."

8. Says that without the election, the following points 9-22 must be used to consider whether it's on the income account

18. The gain or loss on the "short sale" of shares is considered to be on income account.


However 18 is the "otherwise" clause. It is invalidated in situations where the capital election is made, which kicks in at point 6.


So my reading from the CRA notice is that if you've made the election to treat everything on the capital gains, securities sold short are included on the capital account too

 

[james4beach]

P.S. I assure you that the CRA doesn't know the right answer to this either. So your choices are either to complicate your life and try reporting them on the income account (which I think will attract more trouble -- try that with negative income) or stick to capital gains & losses, which appears like a legitimate reading of the notice I posted above.

 

[CPA Candidate]

39(4) does not apply to a "trader or dealer" in securities. Shorting is trading.

Even if that weren't true and #18 wasn't as explicitly clear as it is, the election is permanent. Which means if you lose money on a long trade in the future, you cannot claim it against other sources of income, only sources of capital gain. Having trades show up as income isn't necessary bad if you are bad at trading.

 

[james4beach]

I'm not opposed to reporting it as income, I just can't figure out what's the right way to report it. How would you include it on your T1 General?

 

[real2020]

How did it go?

I'm not opposed to reporting it as income, I just can't figure out what's the right way to report it. How would you include it on your T1 General?

So what route did you take and how did it go?

 

[james4beach]

I have been reporting them on the standard capital gain/loss listing. "Cost" is my buy side, "Proceeds" is my sell side.

If CRA chooses to retroactively consider all of this on the income basis, no big deal. Most of my short selling is for gambits, and those are all small capital losses (buy/sell on the same day). I haven't had any outlandish gains from short selling. Last year for example I had a profitable XEG short and an unprofitable RY short, about balanced each other out.

My accountant has reviewed my last several year's tax returns, where I have consistently reported on the capital account, and they have not raised any issues with the way I'm reporting them.

 

[redsgomarching]

But the act of shorting is purely based on speculation therefore, and one can argue that you don't own the capital property (the security) when shorting, therefore based on those two reasons it is business income.

also generally whenever you are shorting you are typically classified as day trading and are doing so to produce an income so it would be prudent for them to say that you are shorting to produce an income and lets be honest, if you are shorting and not checking regularly what your position is, you are doing it wrong.

 

[james4beach]

Like I said, I've looked into this over the years. I inquired with CRA and I inquired with accountants. For the kind of thing that I do, which is very occasional and small short selling, I have not found any clear answers. Even if CRA forces me to treat it as income, it won't matter much.

If you're trading or doing short selling on a larger scale, your situation may be different.