Probably more than half of Canadian farmers have to look for other sources of income than their farm business alone.
One such source is off-farm work. Many farmers have no alternative but to follow this path, frequently working the farm early in the morning and later in the evening when their off-farm employment has ended for the day.
Another method of generating additional funds is income from sources such as investments in stock market securities and various other financial instruments. The benefit from making such investments is that upon liquidation they are taxed at the favourable capital gains rate on only 50 percent of the gain. The gains may also be offset by capital losses on stocks sold for less than the purchase price. Such losses can also be carried forward for several years.
This method of investing requires at least a modest knowledge of how the market works and the history and performance of the security you are buying.
Another method of investing is intra-day trading, more familiarly known as day trading. Essentially, this method of trading involves opening a position in a stock and closing it later the same day, hopefully for a small gain. Even a gain of one to two percent on a stock added to similar gains on other stocks can amount to significant income at the end of the year.
Unlike standard investing, the Canada Revenue Agency treats day trading as pattern investing, and as such the proceeds are treated because taxable income at the individual’s marginal tax rate and capital gains provisions do not apply.
The good news is losses can generally be applied to all income generated in the farm business. As well, you may claim any expenses incurred to run your day trading activity, such as training costs, computers, research and internet expenses but you must maintain detailed receipts to back up the claim. Income from day trading must also be reported by Dec. 31 each year or you could be subject to serious penalties by CRA.
While day trading in the United States requires a minimal balance in the account of US$25,000, Canada does not require such a limit. However, if you are using a broker that trades in U.S. securities, they will generally follow U.S. Security Exchange Commission (SEC) rules and will require the $25,000 minimum. One way around this is to use a broker that trades in Canadian securities only.
Although all stock market trades carry a certain amount of risk, day trading is considered much riskier. Accomplished specialists in this field recommend that you don’t expose any more than one to two percent of your investment pool in any single security.
Indulging in this type of trading also requires a considerable amount of knowledge about trading strategies, market patterns and the individual securities you are tracking. It is also suggested you start with realistic business and trading plans and develop a spreadsheet that will track your wins and losses throughout the year so you can see your performance at a glance and have the ability to meet your reporting obligations with CRA.
Grant Diamond is a tax analyst in Saskatoon, SK., with FBC, a company that specializes in farm tax. Contact: firstname.lastname@example.org or 800-265-1002.