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Day trading in Canada

Day trading involves the daily buy and sell of stocks in order to make a profit, but it isn't for beginner investors.

Day trading in Canada is entirely legal and a can even be a full-time job. Buy what are the rules of day trading? To learn more about day trading in Canada, day trading taxes and day trading for beginners, keep reading below.

What is day trading?

Day trading is the process of purchasing and selling stocks over a short period of time, normally during a single day. The objective of day trading is to earn a small profit every day, which adds up to larger profits over time. In today’s complex financial markets, day trading is usually considered a full-time job. This is because strategy, education and time are required to be successful at day trading.

Day trading rules

Rules around day trading involve how your gains are taxes and the types of account you can day trade in.

Day trading in a TFSA

As the name tax-free savings account (TFSA) implies, all capital gains, dividends and investment income earned in a TFSA are tax-free. You might be wondering if day trading in a TFSA is possible in order to avoid paying taxes on your capital gains.

The CRA prohibits business activity from taking place within a TFSA. For this reason, if your primary source of income comes from day trading and you spend full-time hours operating your day trades, this is considered business income, not investment income. Business income is defined as income that takes active, deliberate efforts to earn. On the other hand, investment income is income that was earned passively. If you choose to day trade in a TFSA, it should be done with extreme caution. The CRA can monitor your registered accounts to flag for any potential day trading. If the CRA deems that business income was earned in a TFSA, all of the identified business income will be taxed.

Day trading in an RRSP

Investment income earned within an RRSP is tax-deferred (unlike a TFSA, in which gains are tax-exempt). Like TFSAs, RRSPs are meant for personal use only. Day trading is still considered business activity in most cases, regardless of where it’s done. For this reason, day trading in an RRSP should be done with caution. Just like your TFSA, if the CRA deems that business income was earned in an RRSP, all of the identified business income will be taxed.

Day trading taxes

Because of the potential tax consequences of day trading in a TFSA or RRSP, any day trading in Canada should be done in a non-registered account. There are still day trading taxes to consider.

If you day trade every day and treat it like a full-time job, income from your trading is considered business income. If you only day trade now and then to earn some extra income, it would be considered investment income and would be taxed like all of the other interest, dividends and gains you earn in a non-registered account. In this case, you would be considered an investor, not a day trader.

As a general rule, day trading income is considered business income in Canada. If you consider yourself an investor who participates in day trading, be prepared to prove why to the CRA in the event that you’re audited.

Business income tax implications

You must report all of the business income you earn from day trading as such. If you’re a sole proprietor, this income would be reported on your personal income tax return. If you’re incorporated, you would report this income on your corporate tax return. Any losses you incur from day trading will reduce your business income. In addition, you can deduct expenses from your earned income. However, be mindful that the CRA outlines various rules about deductions to business income, which are outside the scope of this article.

Investment income tax implications

As a private investor, not a day trader, your income will be taxed like any other investments on the stock market. If you sold a stock for more than what you bought it for, you would have a capital gain. If you sold a stock for less than what you bought it for, you would have a capital loss. Only 50% of capital gains are taxable. This amount must be reported on your income tax return. Capital losses can only be applied against capital gains, not other types of income. If you don’t use the entire amount of your capital loss, it can be carried forward or backwards in other tax years.

Day trading tips

  • Create a strategy. Day trading involves strategy. Do you trade what’s in the news? Do you buy during the fall? You’ll need to rely on trading strategies that align with your goals so that you can act fast. You can read more on common strategies below.
  • Create an entry point. Deciding what and when to buy is half the battle. You can buy based on liquidity, volatility or trading volume, among other details.
  • Create an exit point. Any gains you make through day trading aren’t realized until you exit your position. Tactics like scalping, fading, daily pivots and momentum can help you identify the point of exit.
  • Leverage charts and patterns. You will need to be precise when day trading. Candlestick patterns, technical analysis and volume trends can enhance your day trading.
  • Utilize limit orders. There are 2 types of orders: market orders and limit orders. Market orders are executed at the best price available at the time, but there’s no price guarantee. With limit orders, the price is guaranteed, but not the execution of the trade. Limit orders can help you cut losses because you set your price (your bottom line) for executing a trade.

Day trading strategies

A good place to start is to develop a strategy. Here are some common day trading strategies:

  • Following the trend. This means buying when stocks are doing up and selling when stocks are going down under the assumption that the behaviour will continue.
  • Trading the news. Similar to the above, this involves buying when good news about a company is released, and selling upon bad news.
  • Contrarian investing. This is the opposite of following the trend. If you are a contrarian investor, you buy on the down and sell on the up based on the assumption that the direction of movement will soon change.
  • Scalping. Scalping takes advantage of small price gaps created by the bid-ask spread. This strategy involves buying and selling quickly, within minutes or even seconds.
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    Day trading for beginners

    Are you interested in getting into day trading? If so, you might be wondering where to begin. Check out these tips on day trading for beginners:

    • Educate yourself. Day trading is not for rookies. In order to day trade successfully, you need to know what you’re doing as an investor. Educate yourself on strategies, timing and taxation through online research and courses.
    • Keep records. Day trading activity must be reported on your tax return. Be sure to keep accurate, secure records of your day trading profits, losses and related expenses. As a general rule, hang onto your records for 7 years. After that, the CRA normally can’t audit your records.
    • Set aside time. In order to learn about and start day trading, you’ll need the time to monitor the markets and your portfolio. Often you only have a split second to act on a trade.
    • Self-regulation. It’s easy to get caught up in the emotional highs and lows of day trading. Greediness, aversion to loss, a recent win and gambling rushes can cause you to make uninformed, emotional decisions. Develop a strategy to keep your emotions in check and focus on making decisions based on real information.

      To learn more about common mistakes beginner day traders make, check out 6 ways beginners lose money day trading.

      Bottom line

      Day trading is usually a full time job, not just a hobby. Day trading involves tax consequences, and you need to abide by CRA rules in deciding the type of account to execute these trades in. You need to be comfortable with executing your own trades, identifying investment opportunities, and using different trading strategies. Luckily there are general day-trading tips and suggestions for beginners to get you started.

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