Question: Can a Canadian TFSA account be used for day trading?
Lets say that someone uses their TFSA account for day trading, and is good enough to make a living from it. Therefore this person is unemployed, as he makes enough money from day trading. So the Canadian government would not collect any income taxes from that person. Would that be illegal or against some kind of TFSA account rules?
Answer:
It isn't illegal, it just isn't practical as you would have no margin so you would be forever waiting for the trades to settle. It would also be very foolish.
No it cannot...daytrading accounts by definition must be margin accounts....tax-free TFSA or tax deferred RRSP or RRIF accounts are not allowed to be margin accounts.
I haven't found anything in the ITA or its regulations to prohibit this, and a Google search turns up all kinds of conflicting statements. It looks like it is legal to hold a margin account in a TFSA, but it also looks like the financial institutions balk at the idea. It looks like you will have trouble finding an institution that will allow this. Try some phone calls to your favourite institutions. If you find one, please let us know who it is.
However, it is not necessary to have a margin account to engage in day trading. By definition, day trading is a strategy under which you close out your positions at the end of each day. Most people extend the definition to say "within a short time" rather than "at the end of the day." There is nothing in the definition about buying on margin.
Buying on margin is a form of leverage. Leverage can multiply your gains AND LOSSES. The more you leverage, the more you gain (OR LOSE). Buying on margin is very appealing when your investments rise, but if you suffer a margined loss even once, you may quickly change your mind. It is possible to lose everything you invested AND MORE.
So go ahead and be a day trader inside your TFSA. Everything you earn is non-taxable. But use your own money instead of borrowing.
P.S. - It may be possible to pledge your TFSA as security against a loan that is taken outside of the TFSA. You should be able to borrow against your TFSA and hold those funds inside a non-registered trading account. And if that's a margin account, you can increase your borrowing limit because of the additional borrowed funds. Since the borrowed money is used to earn taxable income, it would be deductible. I'm pretty sure there is something illegal in this paragraph, but I'm having trouble putting my finger on it. Let's just say that I won't be the one to try this. I've learned my lesson.