I just called my broker (TD Waterhouse) one more time to confirm all this, and what I was told last night by another TD Rep:

They said again, the shares must be held in a Margin Account to be available for someone to short. All other accounts will not work (trading, RRSP, TFSA, etc)

This fellow said in the future if I have questions like this (because they are not common), to tell the Rep to call down to the "Loan Post" as they are the people dealing with this type of trading (TD Waterhouse only)

So, bottom line, get your shares out of your Margin Accounts.

Hope this helps