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As NorthKC says it is just like reporting normal capital gains but the sale happened before the purchase. I would expect that on the Schedule 3 you put the year that you "opened" the position (I.e. sold the shares short) in the date column (I can't remember if that is the purchase date or owned since or what it is called).
 

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I think Schedule 3 can only be used for shorting Canadian stocks, and only when an election has been made:

"The gain or loss on the short sale of shares is considered to be an income gain or loss, unless an election has been made under s. 39(4) to treat them as capital transactions. ... A taxpayer can elect under s. 39(4) of the Income Tax Act to have their transactions in Canadian securities to be treated as capital transactions."
http://www.taxtips.ca/personaltax/investing/taxtreatment/capitalorincome.htm

"The gain or loss on the "short sale" of shares is considered to be on income account. ... The election under subsection 39(4) is applicable only to "Canadian securities"."
http://www.cra-arc.gc.ca/E/pub/tp/it479r/it479r-e.html

To declare gains and losses on the income account, two approaches I have seen so far are to use Schedule 4 line 121 (as other investment income) or to use line 135 (as business income).
 

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Two friends and I have been wondering about this for many YEARS. We've never been able to find a clear answer, and neither have our accountants.

Don't bother phoning the CRA because they have no idea either. The phone agents can handle simple matters, but they don't have definitive information on the short selling.

In the end I used Schedule 3 and reported them on the capital gains account. It's still a buy, a sell, and a gain or loss.
 

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"user" is right about using the income account. Wrapping up everything into capital gains is technically wrong. But I have yet to find anyone online who claimed that the CRA questioned it. (Myself included.) The vital thing is whether you're talking about a large gain from shorting. If so, you're avoiding paying tax on 100% of the gain. In the end, those are the situations that they'll try to identify and drill into.

But james4beach is right that the CRA has no idea either. (And neither did my accountant for the past 5 years. Fail.)

I did find some article somewhere indicating that the CRA was reevaluating their accounting of short sales for institutional traders. (Can't find the source.) So it's possible that this clarification / simplification will filter down to the retail trader as well.

IT-479R is from 1984, last modified in 2002. So yea, if you shorted a stock back then, you were somewhat sophisticated and it's an indication that you are trading for income. I once saw a webinar where a professional trader talked about how no one even thought about shorting stocks during the 2001 tech bust. It just wasn't part of their toolkit, it was all long all the time so most people got slaughtered. But with the current sophistication of online trading, there is ZERO distinction between a long and a short.

Hard to believe we're being twisted into knots over tax guidance that is at least 12 years old.
 

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... I once saw a webinar where a professional trader talked about how no one even thought about shorting stocks during the 2001 tech bust...
I guess some of the retail types were ahead of the pros then as I had some co-workers who shorted stocks including tech at that time. I didn't have the time, knowledge or the account to do it though.


Cheers
 
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