Is Day Trading Legal In Canada?

Trading of financial securities allows investors to earn gains off the price changes that happen during a trading session. While some investors choose to park their funds for long-term gains, others may choose to trade securities, or foreign exchange, and close their positions within one trading session. This practice is referred to as day trading or intraday trading.

An investor may earn gains off a day’s trade by investing in the stock market, foreign exchange market or the cryptocurrency market. While all sorts of day trading are associated with high risk, the latter is considered one with the highest amount of risk, considering its complex nature and high volatility.

The equities market, which allows the buying and selling of a listed company’s equities, is one of the most popular day trading avenues.

Conventionally, brokerages, stockbrokers and professional financial advisors are actively involved in day trading. However, with the advent of online stock trading platforms that bring the activity closer to the lay person, it is no longer limited to professionals.

Nonetheless, day trading is considered riskier for amateur investors as compared to professional stockbrokers or seasoned traders.

The perception that day trading helps investors to earn large profits also sometimes overshadows the financial risks involved in the activity.

While professionals may pick one or many strategies to make their buy/sell decisions, non-professionals are more likely to trade with a lack of insight, putting much of their wealth at risk. Some may also look at intraday trading as an option as risky as gambling.

Seeing the risks involved, is the activity considered legal in Canada? Let’s find out.

Is day trading legally allowed in Canada?

Despite its inherent risks, intraday trading is a legal activity in Canada. However, it comes with certain regulations, which are mostly taxation related.

Unlike the US Securities and Exchange Commission (SEC), which requires traders to have a minimum balance of about US$ 25,000 in their securities account, Canadian rules do not require a minimum balance for trading. However, for trades that need to be closed in the US market, this minimum requirement may apply.

Investors may need to pay some trading fees for their intraday trades. This fee may vary from broker to broker, or platform to platform.

Day traders in Canada may, like investors across the world, employee some trading strategies to gain profits off these short trades.

These techniques include swing trading, arbitrage, and news analysis. Each of these strategies has a varied degree of associated risk, with swing trading being highest both in terms of risk and reward.

• Swing trading takes into account the technical and fundamental analysis of a stock to make an investment.
• Arbitrage, which involves investment in the same security on different platforms, tapping on the difference in the value of the financial instrument, is considered to involve low risk. The reward from this strategy is generally believed to be higher than its low-risk investment.
• News analysis-based trading involves developing a microscopic and macroscopic understanding of the individual stock and the overall economy.

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What are the rules related to day trading in Canada?

One of the key rules to be observed for day trading is the taxation-related norm on superficial losses. This is the rule that overlooks how taxation on intraday trading gains and losses must be calculated.

According to the Canadian taxation norms, a day trader cannot claim the income earned on intraday trading as a capital gain, as those profits are considered “business income”.

However, the Canada Revenue Agency undertakes some in-depth study of an investor’s intent, capability and trading history to determine their individual tax rate.

For the levy of capital gains tax, 50 per cent of the capital gain is taxed at a certain rate. However, business income is taxed at the regular tax rate. Any losses are, thus, tax deductible.

However, a trader making a “superficial loss” rule cannot claim their loss as a capital loss. The Superficial Loss rule, or the 30-day trading rule, mandates that an investor can either claim some tax deduction on the capital loss incurred, or an adjustment to the cost of any remaining or re-purchased securities. The loss could also be completely denied.

This claim on losses can be denied if the investor or an affiliated person acquires a similar or identical security during the 30-day period prior to the sale transaction, and 30 days after the sale. This deduction can also be disallowed in case the investor, or an affiliated party ends up owning the property or its ownership rights.

This 30-day rule prevents frequent traders from making artificial investments as a measure to claim a greater tax deduction.

Now that you have had an overview of day trading in Canada, is it a good idea to start indulging in it? Let’s see.

Should you be considering day trading?

All said and done, day trading is often considered a strategy and adrenaline-driven activity. The possibility of earnings large profits makes it lucrative, however, the flip side of the coin still holds true.

The risk associated with day trading is high as investors may find themselves tempted to invest more after earning modest gains, thus, exposing their capital to greater risks.

An understanding of the market and one’s own risk appetite, along with various analytical tools for studying the investment options and a general news sense are the basics that one may need before kickstarting their day trading journey.

The above constitutes a preliminary view and any interest in stocks should be evaluated further from investment point of view.