A survey of short selling in Canada

This chapter provides insights into the regulatory framework that governs short sales and the taxation of short sales in Canada, and discusses recent trends in short selling activity in Canada. In Canada, the Investment Industry Regulatory Organization of Canada (IIROC) governs most of the activity related to equity short sales through the Universal Market Integrity Rules (UMIR). A proposal was put forward in 2007 to repeal the uptick rule in Canada altogether, however, the market turbulence of 2008 led the IIROC to defer the proposed removal of the uptick rule. Although not part of the IIROC's UMIR, some short selling activity is also prohibited by certain insiders by the Canada Business Corporations Act (CBCA). There are, however, some exceptions to this prohibition that allow insiders to sell short under certain conditions if they own another security convertible into the security sold or an option or right to acquire the security sold. A short sale becomes taxable when the borrowed shares are repurchased and returned to the original owner. Short sales typically have volumes lower than that of the opposing long position in a given security. Short sale volume consisted of 78% of the average trade volume for the TSX and 83% for the TSXV. The lowest level of short sale volume relative to long positions was seen on the CNSX, with an average rate of 52%. UMIR requirements make it necessary to periodically report the short position held in each security on an account-by-account basis. This requirement allows for an analysis of the rates of turnover of short positions and the percentage of securities on a given marketplace that a short position has been undertaken in