Australian-born opening batter McGahey, moved to Canada in February 2020 and began transitioning medically in May 2021.
The International Cricket Council's rules on transgender players, amended two years ago, remain looser than those adopted by a number of sports recently.
Transgender rights in sport have become a controversial issue as sports seek to balance inclusivity while ensuring there is no unfair advantage in women's sports.
Trans women wanting to play women's international cricket must show "the concentration of testosterone in her serum has been less than 5 nmol/L1 continuously for a period of at least 12 months, and that she is ready, willing and able to continue to keep it below that level for so long as she continues to compete".
The ICC also states a male-to-female trans player must "provide a written and signed declaration, in a form satisfactory to the designated medical officer, that her gender identity is female".
The tournament, which starts on Monday in Los Angeles, features Canada, the United States, Brazil and Argentina with the winner earning a place in next year's T20 World Cup in Bangladesh.
A spokesperson for Cricket Canada told the BBC: "Danielle's selection was based on ICC's player eligibility regulations for male-to-female transgender players.
"Danielle sent through her application to the ICC and Cricket Canada followed the process as per the ICC rules, which made Danielle's selection to the Canadian team possible."
The ICC said in a statement: "We can confirm that Danielle went through the process as required under the ICC's player eligibility regulations and as a result has been deemed eligible to participate in international women's cricket on the basis that she satisfies the MTF (male to female) transgender eligibility criteria."
Cricket's rules were common to many sports until the past 18 months when several major international federations began to introduce tighter restrictions.
World Aquatics brought in tight restrictions in June 2022 and in March of this year World Athletics announced that no female transgender athlete who had gone through male puberty would be permitted to compete in female world ranking competitions from March 31st.
