DIY Investors Need to Track Trades Diligently to Stay Onside With CRA

The rise of do-it-yourself investing has left millions of Canadians responsible for do-it-yourself reporting on those earnings to the government.

The number of DIY accounts opened at discount brokerages skyrocketed during lockdowns, from 846,000 in 2019 to more than 2.3 million in 2020, according to data provided by Toronto-based Investor Economics. By 2021, there were more than 3.6 million such accounts.

“It’s a trend attributed to many people staying home because of the pandemic,” says Hanna Roohi, a partner at Roohi CPA LLP. “The rise in low- or no-commission trading that can be accessed with just a mobile phone app makes buying and selling stocks [more] affordable and easier for everyday investors.”

It’s not just boredom and convenience that are driving Canadians to manage their own investments. Ms. Roohi says many people also want to maintain more control over their assets and feel knowledgeable enough to do some or all of their trading without the assistance of a financial adviser.

Investing on your own, however, often also means reporting those gains and losses on your tax return on your own, too. Ms. Roohi explains that investment professionals and institutions typically provide comprehensive tax reports that make filing your taxes to Canada Revenue Agency (CRA) a lot easier for their clients. While many online investment platforms offer capital gain and loss reports, she warns that they don’t always offer a full and accurate picture.

“For example, if you transfer securities between brokerage accounts, the reports produced by the brokerage may not reflect the original cost base,” she says, adding that that’s why “DIY investors need to keep more detailed records than someone who invests with a professional or institution.”

In most cases, Ms. Roohi says, investment income is taxed at a special rate and requires its own documentation, unique from income taxes. Investment income is typically declared on a T5 Statement of Investment Income, which must be issued to investors by the last day of February. In most cases, 50 per cent of any capital gains is taxable at the investor’s marginal tax rate.

“If you earn over $50 in taxable interest or other investment income, you will receive a T5 tax slip,” says Ms. Roohi. “You have to report earned interest below $50 even if you didn’t receive a T-slip for them.”

Canadians are also required to declare investment earnings on their tax return. Interest, foreign interest and foreign dividends are reported on line 12100, Canadian dividends on line 12000, and capital gains income on line 12700.

The amount owing will ultimately depend on the type of investment income, the individual’s marginal tax rate, their province of residence, the type of investments they’ve made, and whether they are eligible for any credits or deductions. For example, investment-related expenses may be deductible, according to Ms. Roohi, and investors may be eligible for a federal dividend tax credit.

Online tax solutions like TurboTax offer a range of resources and products designed to assist Canadian investors, including educational articles, videos and tax guides.

There are also some tax breaks for those who haven’t been as successful in their investment strategies, as capital losses can be used to offset capital gains. “The CRA allows you to carry net capital losses back up to three years,” says Ms. Roohi. “If you have capital gains from previous years, this is a great way to offset them.”

One of the most common ways DIY investors can lower their tax burden, however, is by storing their investments in a registered savings account, such as a Registered Retirement Savings Plan (RRSP) or Tax-Free Savings Account (TFSA).

“Any returns on investments made in a TFSA are tax-free,” says Ms. Roohi. “This means you can grow your money without having to pay taxes on your gains and without your investments impacting your tax return at all.”

“Contributions you make to your RRSP are not taxed, and neither is interest earned from these savings plans,” adds Emily Verrecchia, a tax expert at TurboTax Canada. “However, when you begin making withdrawals from your RRSP, these withdrawals are considered taxable income.”

RRSP investment earnings are taxed at the marginal tax rate at the time they are withdrawn, though there are exemptions, such as for first-time home buyers who use the Home Buyers’ Plan. In most cases, those who expect to withdraw the funds at a time when their tax bracket is likely to be higher may want to consider using a TFSA instead.

In 2023, the TFSA contribution limit increased by $500 to $6,500. Similarly, RRSP contribution limits are specific to the individual taxpayer, based on a range of factors such as income and prior contributions.

“RRSP contributions can be housed in a registered savings account which holds qualified investments like stocks, ETFs, mutual funds, bonds, GICs, and more – it’s flexible,” says Ms. Verrecchia.

Just as it often takes time and research to become a successful DIY investor, it can also take some time and research to accurately report investment income and expenses.

TurboTax is designed for all levels of investing, from stocks, bonds, employee stock purchase plans (ESPPs), rental properties, and crypto to complex investment income.

“With TurboTax, you can do your taxes by yourself, have an expert answer questions along the way and review your return before you file, or meet with an expert while they handle your taxes from start to finish. We’ll provide step-by-step tax guidance through your investments, so you get every dollar you deserve,” Ms. Verrecchia says.

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