Trading Rules in Canada
There are a number of day trading rules in Canada to be aware of. This page will start by breaking down those around taxes, margins and accounts. We will then take a look at whether there are asset-specific rules for stocks, cryptocurrency, futures and options.
Day Trading Tax Rules
In Canada, profits from active or day trading may be taxed either as business income or as capital gains, depending on your overall pattern of activity (frequency, holding period, intention to resell at a profit, and how business-like your trading is).
If your trading is treated as business income, 100% of the profit is taxable, and business losses can generally be deducted against other income. If it’s treated as capital gains, typically only 50% of the gains are taxable, and capital losses can usually only offset capital gains. Consider getting professional tax advice if your trading is frequent or substantial.
Superficial Loss Rule
For Canadian day traders, one of the key tax rules to understand is the 30-day trading rule, also known as the superficial loss rule.
When a superficial loss occurs, you cannot claim that capital loss in the year of the sale to offset other capital gains. In most non-registered situations, the denied loss is instead added to the adjusted cost base of any remaining or repurchased identical property, which effectively defers the loss until a later sale. In certain situations involving transfers to registered accounts such as RRSPs or TFSAs, the loss can be permanently denied.
As the name suggests, the 30-day trading rule in Canada applies to the period beginning 30 days before the day of the sale transaction for the capital loss in question, and the 30 days afterwards.
Losses will be disallowed if both of the following two conditions are met from section 54 of the Income Tax Act:
- “During the period that begins 30 days before and ends 30 days after the disposition, the taxpayer or a person affiliated with the taxpayer acquires a property (in this definition referred to as the ‘substituted property’) that is, or is identical to, the particular property.”
- “At the end of that period, the taxpayer or a person affiliated with the taxpayer owns or had a right to acquire the substituted property.”
Purpose
The point of the 30-day rule is to prevent taxpayers from taking part in artificial transactions purely to cause an immediate capital loss. Without this rule, a trader could sell shares, trigger a capital loss and then re-buy the same shares straight away.
Other countries have their own versions of ‘wash sale’ or 30-day rules for similar reasons, such as the US wash sale rule or the UK’s 30-day ‘bed and breakfasting’ rule.
Final Word on Tax Rules
It’s worth bearing in mind that it is not a sensible idea to try getting around day trading tax rules. The Canada Revenue Agency looks at your overall conduct and intent when deciding whether your trading profits are business income or capital gains. Factors can include the frequency and volume of trades, your holding period, your level of market knowledge and research, and whether you are trading in a business-like manner.
Brokers in Canada
Day Trading Margin Rules
Day trading margin rules differ between Canada and the US. Canada does not impose a specific USD 25,000 pattern day trader equity requirement like in the US, although margin requirements are still set by the Canadian Investment Regulatory Organization (CIRO) and your broker.
Canada also does not have its own pattern day trader (PDT) rule. However, if you trade U.S. securities through a broker that clears in the United States, you may still be subject to U.S. FINRA PDT rules. Under those rules, making four or more day trades in a margin account within a five-business-day period can have your account classified as a pattern day trader, which triggers the USD 25,000 minimum equity requirement.
Some brokers may apply stricter internal thresholds (for example, flagging you after three day trades) to avoid breaching those rules, so it’s important to check your broker’s specific policy.
Instrument Specific Rules
The CRA applies a common framework (business income vs capital gains) across many types of investments, but there are important instrument-specific rules. For example, crypto is treated as a commodity and certain transactions are treated as barter; securities and derivatives have their own detailed guidance and elections.
As a result, the tax treatment of stocks, forex, crypto (including bitcoin), futures, and options can differ in practice, even though the same basic principles often apply.
One Canadian Dollar Cheque
Some brokers, such as Interactive Brokers Canada, may require you to send a CAD 1 cheque that clears through the Canadian banking system to satisfy anti-money-laundering (AML) and identity-verification requirements.
This cheque is generally not credited to your trading account and is non-refundable. This is a broker-specific policy, not a universal rule, and many Canadian brokers do not require it.
For those wanting to avoid such rules, some brokers do not require traders to send in a cheque. However, it is best not to think of this as a strict rule against day trading, it is simply to protect against organised crime.
Money Management Rules
If you’re looking for golden rules to live by, then this next one is arguably the most important.
You must have an effective technique for managing your funds and limiting your risk. As successful trader Larry Hite pointed out, “Throughout my financial career, I have continually witnessed examples of other people that I have known being ruined by a failure to respect risk. If you don’t take a hard look at risk, it will take you.”
Therefore, a popular approach is to never risk more than 1-2% of your account balance on a single trade. Hence, if you had $10,000 in your account, you wouldn’t risk more than $100 to $200 on an individual trade. If a few trades don’t go your way, this could prevent you from being blown out of the game.
Once you have developed a more consistent strategy, you can then consider increasing your risk parameters. This is one of the top examples of rules found in educational PDFs. In addition, it often tops all lists of top 10 rules, and for a very good reason. This is a particularly useful system for beginners to adopt.
Final Word on Day Trading Rules
In Canada, it is important to follow all applicable rules, including tax rules, margin requirements, and trade-settlement rules set by regulators and your broker. The superficial loss rule is a common pitfall for active traders, but it is only one part of a broader framework.
Always review the latest government guidance and consider professional tax advice before trading.