Trading in a TFSA or RRSP: What's Allowed, What Isn't, and the Day-Trading Trap

Canadians love their TFSAs, and many new traders wonder whether they can trade inside one tax-free. The answer is "partly" — with one serious trap.

What you can hold

TFSAs, RRSPs, RRIFs and FHSAs can hold qualified investments, which include:

• shares and units listed on designated stock exchanges (including the TSX and major U.S. exchanges) — stocks, ETFs, REITs;
• government and corporate bonds, GICs;
• mutual funds and segregated funds;
• certain listed options — commonly covered calls and buying calls or puts; brokers set which strategies they permit;
• cash, including U.S. dollars at most brokerages.

What you can't

• Leveraged spot forex and CFDs — they require a margin account and aren't qualified investments.
• Crypto held directly — but Canadian-listed bitcoin and ether ETFs are generally fine.
• Borrowing — you can't use margin inside a TFSA or RRSP, and short selling isn't permitted.
• Uncovered option writing and most advanced option strategies.

Holding a non-qualified or prohibited investment can trigger penalty taxes, so leave it to your broker to decide what's eligible.

Quick reference: what goes where

Your broker's rules may be stricter than the tax rules, especially for options.

The day-trading trap

Income earned in a TFSA is normally tax-free. However, the Income Tax Act makes a TFSA taxable on income from carrying on a business. If you trade frequently — the hallmarks being high volume, short holding periods, significant time spent and market expertise — the CRA may conclude your TFSA is carrying on a trading business and assess tax on the profits. The CRA has reassessed TFSA holders on this basis, and the Tax Court has upheld reassessments.

Practical guidance:

• Occasional trading around a long-term portfolio is very unlikely to be a problem.
• Daily or weekly in-and-out trading in a TFSA is risky.
• If you want to day trade, do it in a non-registered account and treat the results as business income — see day trading rules in Canada.

RRSPs are different: gains aren't taxed until withdrawal, and the "business" concern is less commonly raised, but frequent trading still wastes your contribution room if it loses.

USD accounts inside registered plans

Many brokerages now offer USD TFSAs and RRSPs. Holding U.S. securities in a USD account avoids converting at 1.5–2% every time you buy and sell. RRSPs have a further advantage for U.S. dividends: under the Canada–U.S. tax treaty, U.S. withholding tax generally doesn't apply to dividends paid into an RRSP (it does apply in a TFSA).

To get U.S. dollars cheaply in the first place, see Norbert's Gambit and other conversion methods.