How to max out your TFSA, even if you don’t have the cash handy

Tax free zone.Here’s my latest column from the print edition of MoneySense magazine, written right after the federal budget: Get the new TFSA limit to work for you.

Click on the link for details, but in a nutshell — and has been extensively reported in the media, such as this piece by Gordon Pape (subscribers only)  — there’s no reason why you can’t add another $4,500 to your Tax Free Savings Account right now, in addition to $5,500 you may have contributed anytime on or after Jan. 1, 2015. (Note to American readers: the TFSA is the equivalent of Roth IRAs, providing no upfront tax deductions but which let you eventually withdraw money tax-free in Retirement or for other purposes).

That means a whopping $20,000 per couple. Now while Liberal Leader Justin Trudeau seems to think only “rich” people have that kind of money available, the fact is that many hard-working middle class people have been saving and investing for the better part of two or three decades, and built up substantial non-registered or “taxable” portfolios. Even though they may have paid income tax to acquire the capital in the first place, over those decades they have been paying annual taxes on interest, dividends and (often) capital gains generated by that capital.

As the column points out, those who have built such “open” portfolios don’t have to use new cash to put $10,000 per annum into their TFSAs. They merely have to start transferring their non-registered securities into their TFSAs. This is called a “transfer-in-kind” but as I have pointed out here and elsewhere (see for example last Friday’s piece in the Financial Post: The Million-Dollar Tax Problem), the tax rules are complex. In a blog I wrote this week for Motley Fool Canada, we also look at How to make an extra TFSA contribution if you don’t have $4,500 lying around. Read more

No April Fool’s — time to get serious about filing taxes for 2014

Tax Due DateHere’s my latest MoneySense blog. Now that it’s April and Easter is almost here, you know what that means! It’s tax-filing time: April 15th for Americans, April 30th for Canadians.

As the piece recounts, even if you’ve been staying on top of inputting tax slips and receipts, if you have taxable income you’re better off waiting a few days before filing.

But the good news is that once you file, the onerous task is over for another year, and many can also expect a refund. Plus, of course, winter is finally all but over.  Read more

Don’t let Taxman’s crackdown stop you from maxing out your TFSA

My latest post at MoneySense.ca is headlined “CRA TFSA crackdown no cause for alarm.” Click through for the full piece. While you’re at it check out this post at our sister site which features a one-hour live web chat featuring myself and Financial Post columnist Garry Marr, who has been breaking the stories about the CRA’s crackdown on excessively traded humungous TFSAs. The crackdown drew plenty of comments and suggestions.

For one-stop shopping purposes and convenience, I reproduce below the original text for my MoneySense blog on how investors should react to this crackdown.

 

Only minority targeted in CRA crackdown; keep maxing out your TFSA early in January

By Jonathan Chevreau

office binder taxes house family dollar symbolTax Free Savings Accounts (TFSAs) have come in for a drubbing lately, based on various media reports of a CRA “crackdown” on frequent traders who have racked up excessive gains.

On social media there seem to be a lot of ordinary investors taken aback by this, even though as I have said on Twitter, 99.99% of the almost 10 million Canadians who have a TFSA hardly need to worry about this obscure attack on a few sophisticated frequent traders of speculative stocks in their accounts.

Anyone who holds index funds, ETFs, blue-chip stocks or fixed income and is holding for the proverbial long term should stick with their plans for using their TFSA, including making a full maximum contribution early in January. Frequent online traders making dozens of trades a day are the target, especially if their trading patterns causes the CRA to view them as running businesses inside their TFSAs: if you or I traded that often we’d be losing a lot in trading commissions, even at the $5 or $10 a pop that most online brokerages charge.

As I have also pointed out, TFSAs are the mirror image of the RRSP, which has been around more than half a century. Even if there is a way to define what an “excessive” gain is, does this mean Ottawa would go back through half a century’s worth of deferred RRSP gains? It seems hardly likely.

TFSA remains best game in a highly taxed town

This is really a tempest in a teapot and I’d hate to think anyone scared off by this would fail to top up their TFSA early in January. As I’ve also said more than once, the TFSA is just about the best game in an otherwise highly taxed town. And as I said in this blog a few weeks ago, the uncovering of an end run that lets the wealthy contort their finances so as to collect for three years the Guaranteed Income Supplement (intended for the elderly poor) suggests that either GIS or TFSA rules or both may get tinkered with sometime in the next few years. So it’s best to fill up TFSAs while you can, just in case Ottawa starts to curtail their use for whatever reason. And that includes maximizing your children’s TFSAs if you’re able.

To be safe, check the CRA’s 8-point audit list

The Canada Revenue Agency has rolled out an 8-point list for a TFSA “audit” but a quick scan of the items should reassure ordinary investors that there’s little cause for alarm. I can see how some knowledgeable do-it-yourself investors who love to research stocks and spend time at their trading terminals might feel a bit uncomfortable but it’s pretty clear the CRA is more worried about those who make many (10 or 15 a day) trades and who quickly liquidate their positions. Also on the list are uses of speculative non-dividend paying stocks, those who use margin or debt to leverage their positions, and those who advertise their willingness to purchase certain securities: again, well outside the realm of the ordinary investor trying to create a little tax-free dividend or interest income.

For most TFSA holders, danger is lack of capital gains not excessive ones

The irony about all this attention to a handful of professional speculators gaming the system for spectacular capital gains is that far too many TFSA users are doing the precise opposite. If all you do is go with a default GIC or low interest-bearing investment in your TFSA, then you’re not doing this vehicle justice. Chris Cottier, a Vancouver-based investment adviser with Richardson GMP, says any young investor with large debts – especially high-interest credit-card debt – should forget about TFSAs until they’ve eliminated that debt. Very few investments can create gains greater than those accruing to those who pay off credit-card debt that approaches 20% per year.

But when are debt-free (except the mortgage), you’ll be better off holding equities in your TFSA than fixed-income investments sporting today’s minuscule interest rates.

MoneySense has long espoused a passive “Couch Potato” approach to investing in broadly diversified portfolios spread over geographies and multiple asset classes. That approach is particularly apt for TFSAs and is clearly the polar opposite of the type of investor the CRA is looking for.

So when January rolls around, do not hesitate to max out your TFSA contribution for the year 2015 and if it’s a quality ETF from a well-established manufacturer, I wouldn’t waste a minute’s thought on the CRA.

 

Jonathan Chevreau is Chief Findependence Officer for FinancialIndependenceHub.com.