Note: The information in this blog is for educational purposes only and should not be used or construed as financial or investment advice by any individual. Information obtained from third parties is believed to be reliable, but no representations or warranty, expressed or implied, is made by Questrade, Inc., its affiliates or any other person to its accuracy.
Lesson TFSAs 201
Margin power and your TFSA
Learn more about Margin Power and how it works with your TFSA and Margin accounts.
Margin power enables you to leverage the assets in your Tax-free savings account (TFSA) to increase the potential buying power of your Margin account.
However, to understand margin power, you first need to understand margin trading.
What is margin trading
Margin trading allows you to borrow money from Questrade to increase your Buying power and purchase more investments. In order to access margin trading at Questrade, you will need to open and fund a Margin account.
Unfortunately you can’t use margin within your TFSA (or other registered accounts) account due to Canada Revenue Agency (CRA) rules. However, if you’re interested in margin trading and have equity in your TFSA, this is where Margin Power can help.
How margin trading works
When you trade on margin, you’re borrowing cash from us to invest in larger amounts than what you currently have in your account. The funds and investments in your account are used as collateral for the loan, and the loan is repaid when you sell (or cover) your investment.
To explain this better, let’s look at an example:
You’re interested in buying shares of Company ‘ABC’ at a cost of $10 per share, and have $5,000 in your account. With a registered (non-margin) account you’re only able to purchase 500 shares ($5,000/$10=500).
However, if you’re trading in a margin account and the margin requirement for ABC Company stock is 30%, you could leverage your existing $5,000 to buy up to 1,665 shares, or 3.33 times as much (a 30% margin rate means you can “leverage” or borrow up to $3.33 for every $1 in your account).
When you leverage your existing cash or investments to borrow with a margin account, you need to pay close attention to your buying power. Your Buying power represents the amount of available equity (cash + investments) in your account that you can borrow against
Check out our article on understanding your balances for more information.
How Margin Power works
When you enable Margin Power, the cash and investments in your TFSA account are used to increase the amount of Max buying power available in your Margin account.
The assets in your TFSA account are automatically used as collateral for your ‘Margin loan’ if you exceed the buying power, or drop below the minimum balance.
Until you enable Margin Power, and link your TFSA to your margin account, your Max buying power calculations in your margin account will only be based on the funds you have in that specific margin account.
Benefits of Margin Power
- Increased Max buying power:
The buying power you have in your TFSA account can now be used to help you access greater leverage for the investments in your margin account, increasing the potential profitability of your margin account.
- Reduced risk of a margin call:
A margin call occurs when the the value of the investments in your account decreases and additional funds are required to maintain the margin requirement. By adding buying power to the calculation, you can reduce the risk of a margin call occurring - think of it a bit like overdraft protection.
- Meeting Options trading requirements:
The additional Max buying power enabled through margin power can help meet the minimum equity requirements for more advanced options strategies.
Here are some key things you should know about Margin Power:
Margin Power can come with increased risk if you over-leverage the assets in your TFSA
- If your combined buying power with margin power enabled drops below $0, you will be in Margin call. Since the assets in your TFSA are used as collateral for the loan, unless you close your position, or make a deposit to bring this balance above $0, our trade desk reserves the right to liquidate (sell) your investments in the TFSA to meet the Margin call.
- Please pay very close attention to your combined buying power balances if you choose to use the additional Max buying power provided by your TFSA’s equity through Margin power.
- The funds in your TFSA remain registered if you connect your TFSA to a margin account
- The use of margin power doesn’t impact the contribution room for your TFSA
- The use of margin can magnify both gains and losses on your investments
- Authorized traders need to have permission to trade with both the TFSA and Margin accounts before using Margin power
- If necessary, Questrade will withdraw assets from the TFSA account to cover margin calls in the margin account
- Only one TFSA account can be linked to an individual Margin account through Margin Power
- Only individual Margin accounts are eligible for Margin Power (Joint and Corporate margin accounts are ineligible)
- To continue using Margin Power, a minimum balance of $1 is required to be kept in both the TFSA and the linked margin account
