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 rules in Canada

Day Trading Tax Rules

Day trading income tax rules in Canada are relatively straightforward. On the whole, profits from intraday trade activity are not considered capital gains, but business income. Therefore, profits reported as gains, are subject to taxation, while losses are deductible.

This means a day trader could theoretically subtract all losses from another source of income to bring down the total amount of taxes owed. However, unsurprisingly, there are certain scenarios where it isn’t quite so straightforward, as detailed below.

Superficial Loss Rule

Day trading rules and regulations in Canada mainly concern the 30-day trading rule, also known as the superficial loss rule. But what precisely is this rule? It comes into play when capital gains are disallowed.

You cannot claim a capital loss when a superficial loss occurs. Dependant on the individual circumstances, the loss may be either permanently denied but added to the adjusted cost base of any remaining or re-purchased shares, or in some cases partially 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:

  1. “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.”
  2. “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.

Each nation will impose varying obligations for a host of different financial and sociopolitical reasons.

Final Word on Tax Rules

It’s worth bearing in mind it is not a sensible idea to try getting around day trading tax rules. In fact, Canada Banks, a conglomeration of Canadian based financial institutions, stated the Canada Revenue Agency (CRA), take an in-depth look at the content and intent of a day trader, to determine whether activities should fall under capital gains or trading income.

Day Trading Margin Rules

Day trading margin rules are less strict in Canada when compared to the US. Pattern rules there dictate intraday traders must keep a minimum of $25000 in their securities account.

Fortunately, for Canadians worried about the same rules applying to those with under $25,000 in their account, you can relax, for the most part. This means beginners and those with limited capital will still be able to buy and sell a range of instruments.

Having said that, at some Canadian brokers, the SEC pattern day trading rules still apply. This is because at some brokers, your US securities exchange trades are cleared in the US. So, if you place three stock or option intraday trades on a US securities exchange period within 5 days, you can be deemed a ‘pattern day trader’. Therefore, you would need to adhere to the rules requiring you to have over $25k in your trading account.

For those looking to avoid the $25,000 rule, look for a Canadian broker that doesn’t grant you access to US securities.

Instrument Specific Rules

For those asking do specific day trading rules apply to forex, futures or any other instrument? The answer is no. The Government of Canada and the CRA do not enforce different rules for different instruments.

So, day trading rules for forex and stocks are the same as bitcoin. Having said that, there is one rule below that all intraday traders may have to abide by, depending on your broker.

One Canadian Dollar Cheque

As a result of governmental and regulatory anti-money laundering requirements, some brokers impose one of the more peculiar day trading rules for cash accounts.

Customers can be required to send in a one Canadian dollar cheque, that will need to be cleared through the Canadian banking system. Unfortunately, you will not see this credited to your account and it is non-refundable.

For those wanting to avoid such rules, there are brokers that 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 Harry Lite 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 being blown out of the game.

Once you have you 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 you adhere to all day trading equity, non-margin and settlement rules. In particular, the superficial loss rule is the most important to keep in mind, as it often trips up traders. However, all of the above are worth careful consideration. With this information, you should now be able to trade confidently in the knowledge you are trading within legal parameters.