Forex Trading: Income or Capital Gain Tax in Canada?

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Forex Trading:  Income or Capital Gain Tax in Canada?
By Paul | Published: March 8, 2010
      I’ve always known that foreign exchange trading is treated as capital gain tax in Canada.  But just to be sure before filing my taxes soon, I’ve decided to double check the facts from Canada Revenue Agency.  As you know, the difference between income tax and capital gain tax is substantial.  Income tax is taxed at your marginal tax rate.  Whereas capital gain tax is a generous half of your marginal tax rate.  That works out to a 10% to 20% difference.
Taxes in Canada is generally simple to do.  The problem though, is  sifting through the cacophony of information within the Canada Revenue  Agency to find out the applicable rules.  I’ve copy and pasted a couple of relevant excerpts from the 2010 CRA Income Tax  Interpretation Bulletin for the record.
Basically, forex trading can be treated as either income or capital gain tax in Canada (surprise).  According to IT-95R Foreign exchange gains and losses.

2. Where it can be determined that a gain or loss on foreign exchange  arose as a direct consequence of the purchase or sale of goods abroad,  or the rendering of services abroad, and such goods or services are used  in the business operations of the taxpayer, such gain or loss is  brought into income account. If, on the other hand, it can be determined  that a gain or loss on foreign exchange arose as a direct consequence  of the purchase or sale of capital assets, this gain or loss is either a  capital gain or capital loss, as the case may be. Generally, the nature  of a foreign exchange gain or loss is not affected by the length of  time between the date the property is acquired (or disposed of) and the  date upon which payment (or receipt) is effected.

As you can see, it is very vague.  That’s why forex trading can be  considered income or capital gain tax.  It is up to you and your  accountant to figure out which works for you.
A noteworthy point in the above excerpt is that the holding period is not taken into account.  So there’s no 30-day rule like in the states whereby frequent trading would miss out the capital loss credit if they re-purchase the same asset within 30-day of disposal.
Update: Looks like I have misconstrued the above article with regard to capital loss.  As Olga pointed out in the comments, Chapter 5 of T4037 defines Superficial Loss.  In which if you repurchase your property (e.g. stock) within 30-days after a sale at a loss, then that initial loss cannot be deducted as a capital loss.  More about the Superficial Loss rules in Canada can be found at WhereDoesAllMyMoneyGo.com.
Further down the page in IT-95R, we have the following bullet.

6. A taxpayer who has transactions in foreign currency or foreign  currency futures that do not form part of business operations, or are  merely the result of sundry dispositions of foreign currency by an  individual, will be accorded by the Department the same treatment as  that of a “speculator” in commodity futures see 7 and 8 or IT-346R.  However, if such a taxpayer has special “Inside” information concerning  foreign exchange, he will be required to report his gains and losses on  income account.

IT-346R Commodity Futures and Certain Commodities explains the tax treatment of speculation in the commodity markets.

7. As a general rule, it is acceptable for speculators to report all their gains and losses from transactions in commodity futures or in commodities as capital gains and losses with the result that only one-half the gain is taxable, and one-half the loss is allowable subject to certain restrictions, (hereinafter called “capital treatment”) provided such reporting is followed consistently from year to year.

So there, we have it.  Amateur forex traders, such as myself, can report our forex trading gain/loss as capital gains and losses.  The reason being that forex trading isn’t part of my business operation because I have another primary source of income (e.g. salary from another job).