Can You Day Trade in Your TFSA?

November 6, 2020 | Editorial Team

As day trading grows in popularity, many Canadians have been curious about it. The burning question that is on everyone’s mind is whether or not you can day trade in your TFSA. This is one of the first questions people ask when they start day trading because utilizing your TFSA is a great way to save money. With a TFSA, you don’t have to pay tax on income from investments or capital gains unless it is business income.

Business income cannot be deposited into your TFSA. We’ll touch on why a little later on. For now, continue reading to learn about TFSAs and how you can use them to invest.

What is a TFSA?

A tax-free savings account (TFSA ) is a type of account that the Canadian government created in 2009. With a TFSA, you will not have to pay tax on any interest or income you earn in the account. This includes income from investments, such as day trading, or capital gains.

Anything you contribute to your TFSA cannot be deducted from your income tax. So, you will have to pay tax on any original contributions.

You can open a TFSA at any financial institution, credit union, and some insurance companies. You just need to be Canadian with a valid SIN card and over the age of 18.

TFSA Contribution Rules

Every person with a tax-free savings account has a maximum amount they can deposit every year. This amount is called their contribution room. Anything you deposit into your TFSA counts towards your contribution room. That includes withdrawing money from your TFSA, then depositing it again later.

Every Canadian receives the same contribution room every year. For example, the Canada Revenue Agency (CRA) website states the contribution room for 2020 is $6,000. Everyone’s total contribution room, however, is not the same. This is because any part of your contribution room that is unused will roll over to the next year.

For example, if you opened your TFSA in 2020 and only deposited $3,000, the extra $3000 would be added to your contribution room in 2021. Thus, it is better to open your TFSA as soon as possible, even if you don’t have anything to contribute yet. Every year your TFSA is open, your contribution room will continue to roll over.

If you go over your contribution limit, that is considered over-contributing. You will then have to pay a 1% of the highest excess TFSA amount in your account for every month you were over the limit.

To find out your exact contribution limit for the year, log in to your Canada Revenue Agency account. Or, look for the ‘contact us’ section on the CRA website and customer service can help give you the information.

TFSA Investment Rules

If you already have an RRSP and use it for investments, you will already know the TFSA investment rules because they are the same. Whatever is permitted into your RRSP is permitted into your TFSA. If you don’t already know, here is a list from the government of approved investments.

  • cash
  • mutual funds
  • securities listed on a designated stock exchange
  • guaranteed investment certificates
  • bonds
  • certain shares of small business corporations

If you have foreign funds or earn foreign funds from investments, those can also be contributed to your TFSA. They will, however, be converted to Canadian dollars. If you lose money from your original investment, that does not count as a withdrawal from your TFSA. This means your contribution room isn’t affected by losses.

Securities that trade only on the over the counter (OTC) market are not permitted within your TFSA. If you hold them, you may have to pay penalties or additional taxes.

TFSA Stock Trading Rules

If you plan to trade stock with your TFSA, you should ensure you know all the rules first. Otherwise, you could be left paying tax you didn’t expect to. The most important thing to know about trading stocks is that the CRA may count whatever you earn as business income. If they do, tax rules state you will have to pay income tax on it.

Unfortunately, whether your stock trading investments will be considered business income is completely up to the CRA. The CRA will look at the duration of the holdings and the frequency of the transaction. They will also look at whether you intend to hold your investments to resell at a profit. If the CRA decides it is business income, you will need to pay tax by June 30 the following year.

To avoid this, ensure you are following the rules as best as you can. The income tax act states only stocks listed on a specific stock exchange qualify for a TFSA.

Don’t use your TFSA to trade a lot. Otherwise, you will be seen as using it for day trading. The income from the investments will then be seen as business income and charged tax as such.

If you keep a lot of money in your TFSA, the CRA will flag this as suspicious and assume you’re earning business income. The maximum contribution room possible is $52,000. You may have more than that in your account from investments. But, if you have a lot more, the CRA may assume it is from business income.

So, if you are planning to use your TFSA to trade stock, do so hesitantly and follow the tax rules.

Can You Day Trade in Your TFSA?

As we discussed prior, a constant stream of income into your TFSA from trades is not permitted. This is because the CRA sees day trading as business income. As per tax rules, you need to pay tax on any business income. If it is being deposited into your TFSA, however, you are evading paying taxes on it. If you do so, the CRA may fine you.

It is thus best to avoid day trading in your TFSA entirely. For more information on what kind of trading is allowed within a TFSA, it is best to look for the ‘contact us’ section on the CRA website.

Interested in Day Trading?

The Best Platform for Day Trading – Questrade

Questrade is one of the best investment/ securities dealer in Canada. The platform has been around since 1999, and proven reliable. It was created to offer an alternate way of trading and is only available to Canadians living in Canada.

Using Questrade is easy, especially if you have a registered trading account already. You can transfer your Canadian trading account over to Questrade, so all of your information will be there. If you are new to trading, you can still easily open an account on Questrade.

On Questrade, there is a variety of trading types. You can trade options, stock, exchange-traded funds, and mutual funds. On a separate Questrade program, you can also trade contracts for differences and forex. Initial public offerings, international equities, precious metal purchases, and guaranteed investment certificates are all available as well.

Here are some of the pros and cons of using the best platform for day trading, Questrade.

Pros

  • It is free to purchase exchange-traded funds (ETFs).
  • You can utilize a robo-advisor on Questrade to do your trading for you.
  • Questrade has a web platform, desktop platform, and mobile app. So, no matter where you are, you can access your trading activity.
  • The customer service team at Questrade is excellent. You can talk to someone from Questrade’s team over the phone, through online chat, or by email. Just look for the ‘contact us’ section on their website to get started.
  • There is a wide range of research tools available on Questrade. Choose from things like webinars, how-to-guides, news, chart pattern tools, and more to help educate you.
  • There is no longer an inactivity fee on Questrade. So, if you go a few months without using your trading account, you won’t be charged.
  • You can buy and sell a wide variety of products as Questrade is an extensive securities dealer. Options, mutual funds, stock, exchange-traded funds, precious metal, and many more are all available on Questrade.
  • Questrade is one of the lowest-priced online brokers available in Canada.
  • Demo accounts are available, so you can try trading out before committing to anything.
  • There is no withdrawal fee in Canada.

Cons

  • You have to be a Canadian resident to use Questrade, not just a Canadian citizen. So, even if you are a Canadian living abroad, you can not use Questrade.
  • There is a minimum deposit of $1,000 to open an account on Questrade.

Summary

Many financial experts, including INCOMEDOTCA, agree that Questrade is the best platform for day trading in Canada. It is easy to use, even if you are a new day trader.

Whatever you want to trade or purchase, you can likely find it on Questrade. Bonds, stocks, options, ETFs, mutual funds, and more are all available.

Questrade is the perfect place to trade securities, whether you are a new day trader or a seasoned one. If you are new, you can try out a demo account. If you have a registered account with another institution, simply transfer it over to Questrade. Setting up an account is completely free, so head over to Questrade.com to start trading today!

Day Trading Strategies

Trend Following

Trend following is when day traders follow the price trend of an asset. They will buy an asset when the price goes up. This may seem backward, but trend following believes that the trend will continue. So, if a day trader buys the asset when it’s up, they hope it will continue to go up and make money. Similarly, they will sell when the price goes down because they don’t want it to continue to go down and lose money.

Range Trading

Range trading is another type of day trading strategy. A trader will identify areas that are overbought and oversold. They will then buy at the oversold area and sell at the overbought area. This strategy works best in a market that is not trending, rather one that is meandering up and down. Essentially, the trader buys low and sells high.

Contrarian Investing

This is a type of day trading strategy that goes against the status quo. Day traders will purposefully go against the current market trends. To do this, they will sell when other traders are buying and buy when other traders are selling.

This is an optimistic strategy because traders believe the market can only go up once everyone else has sold out. Contrarian investors, for example, will buy stock from a company everyone believes is failing or about to fail. Then, they will sell the stock once it recovers.

Scalping

Scalping is a day trading strategy based on small, quick profits. This is done by making a large number of trades every day, sometimes upwards of 100 trades. Scalpers believe that the more trades they have, the higher chance they have at earning a profit. Scalpers believe that their large amount of smaller trades will earn more in the end than one or two bigger stocks that have a higher chance of failure.

News Trading

News trading tends to be the most traditional way to day trade. It is aptly named because a trader that uses this strategy will wait for news about the stock price. News can come from the company or economic announcements or even rumours. News about a company tends to either drop or raise the price of a stock. Once it does, a news trader will buy or sell their share.

The Bottom Line

A tax-free savings account is a great way to save more money as you won’t be paying tax on your capital gains, investments or interest. The Canadian government created the account in 2009 with the intention to help Canadians save more money. As it is a government-run program, however, you need to ensure you are paying attention to any tax rules or investment rules when using your TFSA.

If you over-contribute or are contributing business income, you could face a penalty from the CRA. To avoid this, always be aware of what your personal contribution limit is and keep track of it when you deposit money into your TFSA. Otherwise, you will have to pay tax you didn’t expect to at the end of the tax season. Similarly, if you are unsure about what kind of investments you can make with your TFSA, it is best to check with the CRA or an accountant.

While day trading can be a great way of earning money, it cannot be done within your TFSA. As it is constant trading, income earned is seen as business income. So, best to day trade a different way so you can pay tax on the business income. If you don’t, the CRA could file a case against you, and you may end up paying even more in tax and fines than you should have in the first place.

If you are interested in day trading, Questrade is a great place to start. It is the leading online broker in Canada, and the trading platform has been around since 1999. Head over there now to open an account for free!