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What to expect at tax time with your Margin account

Posted by Nancy Hall-Chapman March 16, 2021 • 5 min read

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  • How typical activities in your Margin account get reported
  • What you need to know when you sell an investment
  • How income earned from your investments is reported

 

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2020, despite its many stresses and challenges, may have been an active and hopefully profitable trading year for you. Now it's tax time, and if you have a Margin account, you may be wondering what tax slips you're getting as a result of your account activity over the past year. We’re going to walk you through what to expect so you can be better organized for filing your tax return.

Activity in your Margin account—and how it gets reported at tax time

There are two types of activity that can occur in your account during the year. You may initiate certain actions, such as buying or selling a stock, ETF (exchange-traded fund), or other asset. Or, activity occurs with your investments; for example, a company you own pays a dividend. Here's how these activities get reported:

  • If you deposited money into your account or purchased stocks or other investments, you don't receive a tax slip; however, your purchases will appear on a Trading Summary
  • If you sold investments you previously purchased (including transferring them to a registered account), you receive a T5008 tax slip and the sale is included on the Trading Summary
  • If investments you bought paid income, like a dividend or interest, we provide you with an Income Summary and, if the income is above a certain amount (for T5), a tax slip based on your residency will also be provided

Since selling investments in your Margin account and earning income on them have the biggest impact at tax time, let's take a closer look at these.

Selling investments in your account—how that gets reported

During the tax year, if you've sold an investment that you'd previously purchased, or if you did a short sell and then closed your position, you've made either a capital gain (profit) or capital loss. This is the difference between the money you initially invested and the amount you received from the sale. To figure out the actual capital gain or loss from a sale, you need to know your adjusted cost base, or ACB.

The ACB is the cost of purchasing a stock or other investment, which is adjusted for expenses such as commission and other activity in your account related to that stock. For more on the ACB and how it is calculated, see What you need to know about next year's taxes right now.

If the money you receive from the sale of a stock is greater than the ACB, then you've made a capital gain. Yes, that's taxable, but only 50% of your total gains. This would be added to your taxable income.

So, for example, if you bought shares in a company for $8,000 and sold them for $12,000, you've made a $4,000 capital gain or profit. You need to declare this profit as income, but at 50% of your total gains, so you would only have to add $2,000 ($4,000 x 50%) to your total taxable income.

If the money you receive from the sale is less than the ACB, then you have a capital loss. While that's less to cheer about, a capital loss can be used to offset capital gains you have in either the same year, any of the preceding 3 years, or in future years.

From the sale of your investments during the year, you receive these two tax documents around March 1:

  • Trading Summary, which reports all trading (buys and sells) in your account
  • T5008 (Statement of Securities Transactions), which reports the amount paid or credited to you for investments (securities) you sold during the tax year. Note two important areas on this form:
    • Box 21, which reports the money you received for selling an investment
    • Box 20, which is the book value (cost base) for the investment that was sold and which may or may not represent the actual ACB

There are a couple of important takeaways here:

  1. Neither the Trading Summary or the T5008 states your gains and losses. You use these tax documents, along with your own records you keep to track your buys and sells, to help you calculate the gains or losses for investments you've sold during 2020.
  2. You need to track the ACB for each of your investments throughout the year. If you haven't been doing this already, it's a good idea to start doing it now so you're organized for the next tax season.

If you need more help with calculating the ACB so you can accurately report your capital gains and losses on your tax return, check with a tax or accounting advisor.

How income earned on your investments gets reported

Throughout the year, income may be earned on your investments, typically as a dividend, or as interest on bonds and Guaranteed Investment Certificates (GICs). For investments you own, you could expect to receive one or more of the following tax slips:

  • T5/RL-3 (Statement of Investment Income) - reports dividend, interest, and other income from a Canadian organization structured as a corporation, and foreign income. A T5/RL-3 is not issued if your total investment income is less than CDN$50 or US$50; however, you must still include this income on your tax return.
  • T3/RL-16 (Statement of Trust Income) - reports income from a Canadian organization structured as a trust
  • T5013/RL-15 (Statement of Partnership Income) - reports income from a Canadian organization structured as a partnership

Note: Quebec residents receive an RL-3, RL-16, and RL-15 in addition to the T5, T3, and T5013.

Along with the tax slip, you'll also receive an Income Summary which lists all income earned in your account for the tax year. The total of each type of income (such as dividend or interest) appears in a separate box of the appropriate tax slip.

And, here's some good news—if you've earned a dividend on a Canadian corporation, you may be eligible to receive the Federal Dividend Tax Credit, a non-refundable credit that reduces the amount of tax you owe.

We've covered the key points on how activity in your Margin account gets reported at tax time, but there are also other situations you should also be aware of. For example, if a merger occurs with a company for which you hold stocks, this may result in some income being paid in cash, in kind, or as deemed (non-cash) income to you. This may be considered by the CRA as taxable income, and if so, it would be reported on a T5 or T5008 tax slip.

For more information on what to expect at tax time with your Margin account, please take a look at Tax considerations for your Margin account.

For general information about tax season and your accounts, visit Getting ready to file your tax return and Important dates for tax slips.

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The information in this blog is for information purposes only and should not be used or construed as financial or investment advice by any individual. Information obtained from third parties is believed to be reliable, but no representations or warranty, expressed or implied is made by Questrade, Inc., its affiliates or any other person to its accuracy.