TFSA…  another soon-to-become familiar acronym in the lexicon of government plans and possibly another step on the road to increasing financial complexity which at some point just becomes muck for the mind.  Therefore as my Mom used to say; “It is always good to step back and take a bird’s eye view of a pig’s rump in the moonlight.”

No one can be sure how to build a structure, until you get the blue prints, but it looks like the TAX FREE SAVINGS ACCOUNT (TFSA) will be a good tool for creating wealth.  RRSPs, RESPs, and RIFFs have been far better tools for the government than they have been for tax payers.  However those who have learned to beat the system have done well by the RRSP.  When you understand that an RRSP is not a good tool to use for retirement income, but that it is a good planning tool for retirement you can make good use of them.

Now we begin a new journey as we start to look at TFSAs.  It is first of all most important to see the TFSA account as a “Planning Account.”  Or another way to look at it is as one of the tools in your wealth creation tool box. The highest and best use of a TFSA will be for the purpose of making money.  Real Estate is an established way to make money.  Why not consider using it for that?

The TFSA is nothing short of a brilliant move by our government on several of fronts.  Government has come up with a great way to switch retirement planning tools without upsetting the present applecart.  Something needed to be done as more and more Canadians are realizing that RRSPs don’t save taxes in the long run they just defer them until you can afford them even less.  TFSAs are good for the government as they are a way to get people to pay their taxes now on a portion of their savings plan which, unlike an RRSP, defers the tax until retirement time.   This will be a good money generator for CRA. 

In addition, when Canadians save their money, it creates money in the bank that the government can borrow; it keeps us feeling poor and our noses to the grindstone and in the governments’ mind “Idle hands are the tools of the devil.”  As a minimum it is a way to get Canadians on the band wagon of not needing social help at retirement time.  Using the TFSA to invest stimulates activity in the investment market, which of course is good for the economy even if it is not always good for the investors.

If one can look to the past to predict the future, then as they did with RRSPs, the government will start out small and keep adding more and more deposit room.  I see this as a kind of reverse strategy.  Create a perception of limitation and everyone will go for the maximum.  So my prediction is that people will max out their TFSAs and the amount of the cumulative room in will keep on growing.  And of course the banks will jump on board with the TFSAs being promoted as much if not more than RRSPs.

So, I see the TFSA as a socially conscious thing for our government to do.  I like it.  But as in all government programs there are pitfalls if you don’t watch where you tread.  Get some good guidance and understand that most people lose money with their investments over the long haul.  So do it right and be one of the winners.

TFSAs: The Basics

• Starting in 2009, Canadians 18 and over can save up to $5,000 a year.

• Contributions are not tax-deductible, but all interest and capital gains accumulate tax-free.

• You can withdraw money for any purpose at any time - and repay withdrawals without using up contribution room.

• Unused contributions can be carried forward, there is no lifetime limit and contributions can be made on behalf of a spouse. Limits: $5,000 per year to start.

Allowable investments: Same as RRSPs, which means stocks, bonds, funds and savings accounts.

Basic concept: A TFSA is a vehicle for tax-free savings and investment available to anyone 18 and older.  It is an identifiable place to park money that is not part of your cost of living.  It is not a reasonable place to earn interest unless you already have financial security arranged for your retirement.  Interest is nothing more than preservation of existing capital from bank fees and inflation.

Advanced concept: A tool to use for managing money used to make more money.  The TFSA needs a mental rider; thou shall not use this money for non-discretionary non-money making activities.  The money in needs to be considered the same way most people use RRSPs… as a savings account for retirement.  In this case it is a money making account for retirement planning.

You can use a TFSA for anything allowed for in an RRSP.  The strategy needs to be the intent of using the money to make money.  If you are going to go for passive investments, such as stocks and bonds and GICs then you are never going to get ahead.  If you factor in inflation with a low return, there is no point in doing this.  The money has to make more than 10% or it makes no sense to use a TFSA.

Keep in mind that as much as possible the money going into a TFSA should be after tax dollars from things like gifts, tax refunds and repatriated capital from investments.  You should create a chequing bank account that is dedicated to working with your TFSA to avoid money going for purposes other than that of building wealth.  Oddly enough a good time to make a deposit in a TFSA is when you are at a low marginal tax rate because you pay less income tax that way.

You could also use this money at year end as a tax deferral plan.  For instance you could do some last minute year end spending on money earning expenses that are tax deductable to wipe out tax owing. This would be the same as getting an investment return equal to the percentage rate of your marginal tax rate.  An example of this type of expense practice for a real estate agent or broker, would be to pay the full amount in their TFSA towards advertising costs, cost of an assistant’s labour and networking events and associations.

Another potentially good plan is to recommend that your clients loan their money out as second and third mortgages and bridge financing to qualified clients.  Done properly this could make money for your clients and generate a good source of funds to assist people in financing property purchases.  Just make sure you know what you are doing and follow professional advice.

So you say…well, if I cannot reduce my taxes by contributing, I am limited in what I can invest my money in and I am limited to contributing only a small amount of money each year, why bother?

The answer is: The primary rational is that a little bit of money over a lot of years, amounts to a sizable chunk of money over the long haul.  However the best idea is to see it as a way to create a bank account dedicated to the creation of wealth.  To grow that fund and when you retire, to deposit all your money there up to your full allowable room and be able to bring that amount out without government claw backs. Also TFSAs can be used for retirement planning because the accounts could be willed to a spouse upon death, or the assets transferred to the spouse’s account.

I am not a great fan of the Harper Government, but they are earning my begrudging respect.  They do have a sensible approach to taxes and the economy.  This looks like a good move on their part.

Dan White

President

WNBC

[1] www.wnbc.net and [2] www.danwhite.ca