My name is Mark Goodfield. Welcome to The Blunt Bean Counter ™, a blog that shares my thoughts on income taxes, finance and the psychology of money. I am a Chartered Professional Accountant and a partner with a National Accounting Firm in Toronto. This blog is meant for everyone, but in particular for high net worth individuals and owners of private corporations. The views and opinions expressed in this blog are written solely in my personal capacity and cannot be attributed to the accounting firm with which I am affiliated. My posts are blunt, opinionated and even have a twist of humor/sarcasm. You've been warned.

Wednesday, November 3, 2010

TFSA's- I Opened The Account, Now What?

I think by now, most Canadians are familiar with Tax-Free Savings Accounts (“TFSA’s”).  In today’s blog, I will provide a quick summary of TFSA’s, but I also want to veer off  into a discussion of the growth potential of TFSA’s and how the actual deployment of your TFSA funds will affect you from an income tax and investment perspective.

TFSA’s have been in existence since 2009. You can contribute up to $5,000 a year into a TFSA and you can carryforward unused contribution room. There is no income tax deduction for contributing to a TFSA; however, the income earned inside a TFSA is tax-free. In addition, you can withdraw monies from a TFSA tax-free at any time and can re-contribute the amounts you withdrew anytime after the year of withdrawal (i.e. if you withdraw money in 2009, you can re-contribute beginning in 2010).

Initially, I found my clients were indifferent to TFSA’s, however, with the banks and investment houses pushing these accounts, most clients now have TFSA’s.  I think the fact you are investing only $5,000 a year in a low interest rate environment has caused many to look at the account as small potatoes. However, they seem to snap to attention when I inform them that if they contribute $5,000 a year for 20 years at a return of approximately 4% they will end up with around $150,000, and if their return is closer to 6% they could end up with around $200,000.

Once you realize the potential growth power of a TFSA, I think you then need to get a handle on what the TFSA means to you. Is it solely a rainy day fund? A tax-free replacement to your regular trading account? Something in the middle?

After answering the above question, you or your advisor must then address how you invest your TFSA funds. If your TFSA is a rainy day fund, clearly you and your advisor should ensure you hold risk-free investments such a GIC’s, money markets, etc.

But what if you, like many of my clients, are a higher net worth individual and are essentially just moving money from your trading accounts to your TFSA? As a Chartered Accountant I cannot advise you on what to invest in, but I will tell you what I have seen.  Many clients have just “thrown” their TFSA funds into GIC’s or Money Markets. Others have placed the funds in ETF’s, mutual funds, etc. looking at the TFSA as a long term growth investment. Some of my more sophisticated clients have been stock pickers and purchased higher growth stocks to try and maximize the tax-free aspect of the TFSA. The result is that some clients have $20,000 to $30,000 in their TFSA’s today, while other clients have picked incorrectly and have only 30% to 40% of their original investment remaining.

Whether you are the ETF-type, Mutual Fund-type, or stock picker, what you have to understand is that the tax-free aspect of the TFSA may come at a cost for equity investments. If your investments increase in value, at the high rate in Ontario you have saved 23% in income tax on your realized capital gains within your TFSA. However, if your investments decrease in value and are sold in your TFSA, you will have forgone the capital loss you could carryforward outside your TFSA. Very clearly, you are playing off a potential tax-free capital gain against the risk of incurring a capital loss which is forgone.

In conclusion, once you invest in a TFSA, you need to consider the significant growth potential as the years march by and discuss with your investment advisor your investment strategy on the funds accumulated.


For the Love of Football?

I am a casual football fan. I usually only watch when there is a specific game of interest or nothing else on TV. However, the last few years I have been in a suicide football pool (initially created by my son’s hockey coach to raise money for the team) where you pick a winner each week and are eliminated if you select a losing team. It is incredible how much my level of interest and awareness of all things NFL has increased since I joined the pool. I now follow ESPN’s top picks, watch the NFL Network previews of games, etc. to get all the facts for my weekly pick.

I know my friends have had the same experience. However, except for diehard NFL fans, we all have the same response once our teams are eliminated - complete indifference to the NFL. Whereas the week before I was eliminated I could tell you the injury list for each team, two weeks after I am eliminated I cannot even tell you which teams are playing.
It just makes one realize how intertwined the NFL’s success is with legal and illegal betting and football pools.


The blogs posted on The Blunt Bean Counter provide information of a general nature. These posts should not be considered specific advice; as each reader's personal financial situation is unique and fact specific. Please contact a professional advisor prior to implementing or acting upon any of the information contained in one of the blogs.

12 comments:

  1. I am a great fan of TFSA’s and I marvel at the tax free opportunity this opens to Canadians. Once I realized the TFSA is the instrument with the best tax breaks in our current tax system I have been advocating this amongst friends and relatives. In my opinion, the maximum benefit out of TFSA may be obtained through self directed TFSA . I had initially opened TFSA with ING since it was hassle free, but since then have moved them to self directed ones.

    Some financial consultants have projected that investing through a self directed TFSA has the potential to grow into millions of dollars given its tax free nature and the advantage of time and I agree with that possibility.

    I started with a bang with three self directed TFSA last year, one for my son who had just turned 18, my wife and myself. I was aggressive initially and lost a bit investing in US biotech companies given the market conditions at that time. However, I changed my strategy and since then, not only have I recovered the losses but have turned them into reasonably good portfolios by investing in some Canadian small cap shares.

    I think TFSA’s are a gift from the government with huge financial implications including retirement planning for the average individual. It is left to individuals to get the best out of it and my suggestion is to take the self directed route. In 2011, for those who have not yet opened TFSA, $ 15,000 is a good amount to start a self directed TFSA taking advantage of the room available since its inception. In this low interest environment it is even worth considering borrowing to invest in TFSA. For passive investors my suggestion is to buy few blue chip company shares in different sectors and leave them in the account to grow and you will be amazed by the sheer possibility.

    Good luck with your TFSA

    ReplyDelete
  2. I am a great fan of TFSA’s and I marvel at the tax free opportunity this opens to Canadians. Once I realized the TFSA is the instrument with the best tax breaks in our current tax system I have been advocating this amongst friends and relatives. In my opinion, the maximum benefit out of TFSA may be obtained through self directed TFSA . I had initially opened TFSA with ING since it was hassle free, but since then have moved them to self directed ones.

    Some financial consultants have projected that investing through a self directed TFSA has the potential to grow into millions of dollars given its tax free nature and the advantage of time and I agree with that possibility.

    I started with a bang with three self directed TFSA last year, one for my son who had just turned 18, my wife and myself. I was aggressive initially and lost a bit investing in US biotech companies given the market conditions at that time. However, I changed my strategy and since then, not only have I recovered the losses but have turned them into reasonably good portfolios by investing in some Canadian small cap shares.

    I think TFSA’s are a gift from the government with huge financial implications including retirement planning for the average individual. It is left to individuals to get the best out of it and my suggestion is to take the self directed route. In 2011, for those who have not yet opened TFSA, $ 15,000 is a good amount to start a self directed TFSA taking advantage of the room available since its inception. In this low interest environment it is even worth considering borrowing to invest in TFSA. For passive investors my suggestion is to buy few blue chip company shares in different sectors and leave them in the account to grow and you will be amazed by the sheer possibility.

    Good luck with your TFSA

    ReplyDelete
  3. I agree that if the TFSA is not a rainy day fund and is an investment fund, that equities may make sense due to the tax free growth on the capital gains. However, as mentioned in the blog above, markets also go down and you must accept a loss on the sale of shares or ETF or mutual fund in your TFSA is a capital loss foregone.

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  4. I think if your TFSA was a "rainy river" fund and not a "rainy day" fund, you would be much happier and more inclined to use a TFSA.

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  5. I would like to be able to suggest stock picks, but as a CA I cannot, but nice stock selection.

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  6. BBC - What investment product(s) cannot be held within the TFSA? I have funds in my business invested with a company which provides 1st and 2nd mortgages and short term loans to clients who are unable to go to banks because they normally have more restrictive rules. Anyway, this investment earns 8% payable monthly (to company). I would love to hold such a product in my TFSA but I kind of doubt it's possible.
    BTW - I'm old enough to remember a time when interest earned in a savings account was not taxed. I really begrudge paying this tax. Thanks in advance for your comments.

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    Replies
    1. Hey Anon

      Wow, you must be really old :)

      Here is link to what you can hold http://www.taxtips.ca/tfsa/investments.htm

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    2. BBC - I asked one of the principals and the answer is NO. What I have invested within the company could not be transferred or (swapped) because it is not outside "arms length". Having said that, the investment product itself does not qualify. They (the investment company) would have to jump through a bunch of tax law / legal hoops to qualify the investment product so it can be held within a TFSA or RRIF.
      Lesson: ask questions before proceeding.
      Ok enough of me babbling on.
      Bye for now, Nugget (our golden retriever's name)

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    3. BBC - seeing that the annual TFSA dollar limit for 2013 is $5,500 and it was 5000 for 2009 to 2012 - then the total catch including 2013 is $25,500 right ?

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    4. Hi Anon, yes the total cumulative amount is now $25,500

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  7. Wondering if I can use my TFSA as an income splitting tool. Goal is to move money from my spouse's taxable investment account into our joint taxable account. Can I move shares in my TFSA into the joint account and my husband move the same amount from his taxable to the joint. Plan would be to start at the end of next Dec. Then the following January my husband would give me cash to rebuy same or similar equities in my TFSA. With $55K in my TFSA this would in effect allow him to move $110K plus each year into the joint account. CRA allows him to give me money for my TFSA but wonder if the plan would be deemed allowable. Great blog!

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    Replies
    1. Hi Anon

      I do not provide personal tax planning advice on this blog. However, you may wish to read this article which is at least partly on topic.
      http://www.theglobeandmail.com/globe-investor/investor-education/your-tough-tfsa-questions-answered/article23233954/

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