The issue is that an RRSP and TFSA are only allowed under a cash account. No margin is allowed.
Selling options or shorting stocks requires margin account.
Right...and just to clarify, this is because of tax laws regarding RSP and TFSA accounts, not IB per se. Selling options is generally not allowed in these accounts, irrespective of the broker (with the exception of covered calls, I believe, as OP mentions). Shorting equities is also not permitted within registered accounts.
That said, the details are involved. If this is a matter of considerable consequence for you, you might want to consider contacting a tax accountant or tax lawyer. I am not a professional in this area.
The following documents are a good place to start when considering tax questions related to registered accounts in Canada:
S3-F10-C1, Qualified Investments - RRSPs, RESPs, RRIFs, RDSPs and TFSAs and
S3-F10-C2, Prohibited Investments - RRSPs, RRIFs and TFSAs
Here are a few excerpts you might find relevant:
S3-F10-C1 Section 1.41 states: "A registered plan that engages in option writing strategies that are speculative in nature may be considered to be carrying on a business." If the CRA were to rule that you are carrying on a business within a registered account this would be an
especially troubling occurrence. Not only would you be taxed on profits garnered within a sheltered account but your profits would be taxed
as income (ie typically double the rate of capital gains).
S3-F10-C1 Section 1.83 states: "Adverse tax consequences apply to deter registered plans from borrowing money... If a TFSA borrows money or any other property contrary to paragraph 146.2(2)(f), paragraph 146.2(5)(c) provides that the arrangement automatically ceases to be a TFSA effective at the time the borrowing occurs. As a result, the arrangement will lose its tax-exempt status from that time forward." Obviously this would be extremely undesirable and so precludes short selling.
S3-F10-C2 Section 2.19 states: "If a registered plan acquires a prohibited investment or an existing investment becomes prohibited, the plan’s controlling individual is subject to a tax under section 207.04. The tax is equal to 50%
of the fair market value of the prohibited investment at that time." (emphasis mine)
