Taxpayers hit with penalties on tax-free savings accounts
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Here is a nice article, on how you can dinged with a heavy penalty for playing around with your TFSA or more popularly known as Tax-Free Saving Account.
Canadians are being penalized for excess contributions, even though they kept their balances under the $5,000 annual limit.
If you have contributed the maximum to a TFSA and you withdraw any of your money, you must wait until the following year to contribute again.
Removing and replacing money in a single year means you’ll get dinged for 1 per cent of the amount you contributed over the initial $5,000.
http://www.thestar.com/business/article/822383--roseman-taxpayers-hit-with-penalties-on-tax-free-savings-accounts?bn=1
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SS
Reiki Grand Master
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sudesingh
Senior Desi
Member since: Jul 04
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Posts: 2080
Location: Toronto
 12-06-10 18:08:36
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pratickm
Global Moderator
Member since: Feb 04
Posts: 2831
Location: Toronto
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Geez man, trust people to screw up such a near-perfect scheme of tax sheltering.
The rules were very clear at the begining - you must wait until next year to re-contribute any withdrawals.
Doing things like this simply give the govt. an excuse to clawback the scheme or abolish it altogether.
Next elections, another political party comes in and says that TFSA is being abused by people so we are dissolving the scheme.
People have been using it as a day trading account, as an alternative chequing account and whatnot.
We all will suffer for the follies of some.
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"Mah deah, there is much more money to be made in the destruction of civilization than in building it up."
-- Rhett Butler in "Gone with the Wind"
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12-06-10 19:56:49 |
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benparsad
Senior Desi
Member since: Jan 06
Posts: 412
Location:
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TFSA benifits.
Hi;
I feel, I am not getting all the benifit of a TFSA account. In my opinion, this TFSA has edge over any simple saving account for following only-
Assuming 2 % interset, tax bracket of 27 %, a saving of 0.27*0.02*5000 =
which is saving of $ 27 in first year, $ 54 in second and so on ...
Is there more than that?
-Ben
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13-06-10 01:58:21 |
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Iceberg
Senior Desi
Member since: May 05
Posts: 919
Location: GTA and beyond
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yes, the rules were very clear and people have just goofed. however many institutions have also reported incorrectly. they have reported transfers of tfsa from one institution to another as contributions which should not be the case.
secondly, day trading was always ok. cra never objected to that. the problem came up when people abused the tfsa to transact swaps between tfsa and rsp account and in turn transferring all the wealth from rsp to tfsa and withdraw from tfsa and pay zero tax to cra. those people i am sure are in big trouble with cra.
p.s. the 'shift key' has gone 'cuckoo'. so no caps.
Quote:
Originally posted by pratickm
Geez man, trust people to screw up such a near-perfect scheme of tax sheltering.
The rules were very clear at the begining - you must wait until next year to re-contribute any withdrawals.
Doing things like this simply give the govt. an excuse to clawback the scheme or abolish it altogether.
Next elections, another political party comes in and says that TFSA is being abused by people so we are dissolving the scheme.
People have been using it as a day trading account, as an alternative chequing account and whatnot.
We all will suffer for the follies of some.
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13-06-10 09:15:24 |
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Iceberg
Senior Desi
Member since: May 05
Posts: 919
Location: GTA and beyond
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please do not buy gic's in tfsa. what are you saving in terms of taxes. buy stocks - good dividend paying ones or mutual funds.
Quote:
Originally posted by benparsad
Hi;
I feel, I am not getting all the benifit of a TFSA account. In my opinion, this TFSA has edge over any simple saving account for following only-
Assuming 2 % interset, tax bracket of 27 %, a saving of 0.27*0.02*5000 =
which is saving of $ 27 in first year, $ 54 in second and so on ...
Is there more than that?
-Ben
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Last edited by: Iceberg on 13-06-10 09:17:14 |
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13-06-10 09:16:54 |
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DesiTiger
Senior Desi
Member since: Aug 03
Posts: 1205
Location: Mississauga
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Quote:
Originally posted by benparsad
Hi;
I feel, I am not getting all the benifit of a TFSA account. In my opinion, this TFSA has edge over any simple saving account for following only-
Assuming 2 % interset, tax bracket of 27 %, a saving of 0.27*0.02*5000 =
which is saving of $ 27 in first year, $ 54 in second and so on ...
Is there more than that?
-Ben
As far as I know, this is it. Just another way for the Govt. of Canada to pull wool over people's eyes. What surprises me is how many people go giddy over the so called "tax savings" but can't get the simple math above 
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Microsoft - Which end of the stick do you want today?
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13-06-10 10:10:08 |
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Pramod Chopra
Senior Desi
Member since: Sep 03
Posts: 1284
Location: Pickering, ON
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Quote:
Originally posted by pratickm
Geez man, trust people to screw up such a near-perfect scheme of tax sheltering.
The rules were very clear at the begining - you must wait until next year to re-contribute any withdrawals.
Doing things like this simply give the govt. an excuse to clawback the scheme or abolish it altogether.
Next elections, another political party comes in and says that TFSA is being abused by people so we are dissolving the scheme.
People have been using it as a day trading account, as an alternative chequing account and whatnot.
We all will suffer for the follies of some.
Hi Pratick,
You are right that it is a very good vehicle for savings and improving your net worth slowly over time if used properly.
However, I believe that the name should have been TAX FREE SAVINGS PLAN instead of TAX FREE SAVINGS ACCOUNT. It gives the impression to people at large that it is a savings account which can only be opened with banks and can be used freely and that is causing confusion with general public and I believe the banks do not do a good job educating people when they open this account. I do not think they generally tell them that this is a very sophisticated investment vehicle where in they can have all those investments which generally can be held in an RRSP account and may be the people do not understand the rules attached with withdrawals and contribution for this type of account.
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Pramod Chopra
Senior Mortgage Consultant
Mortgage Alliance Company of Canada
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13-06-10 11:18:06 |
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sumjo
Senior Desi
Member since: Jun 04
Posts: 351
Location: Mississauga
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Well Patrick, I do swing trading through my TFSA stock trading acc, and before I opened this type of acc, confirmed & re-confirmed with the bank that its absolutely within the rules as laid down by CRA.
Whatever gains that I make from trading doesnt invite any taxation, because the acc itself is under TFSA!!
I am pretty sure that I am not breakng any CRA rules here, OR am I missing something here???
Quote:
Originally posted by pratickm
Geez man, trust people to screw up such a near-perfect scheme of tax sheltering.
The rules were very clear at the begining - you must wait until next year to re-contribute any withdrawals.
Doing things like this simply give the govt. an excuse to clawback the scheme or abolish it altogether.
Next elections, another political party comes in and says that TFSA is being abused by people so we are dissolving the scheme.
People have been using it as a day trading account, as an alternative chequing account and whatnot.
We all will suffer for the follies of some.
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sumjo
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13-06-10 13:38:07 |
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pratickm
Global Moderator
Member since: Feb 04
Posts: 2831
Location: Toronto
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Quote:
Originally posted by Pramod Chopra
However, I believe that the name should have been TAX FREE SAVINGS PLAN
That is a very appropriate description, Pramod ji.
I don't think the govt. made it clear what the scope of this policy is, and the banks obviously do not want to make it clear either.
It is in the interest of the banks to let people continue believing this is just another type of savings account.
That way they can get people to stay locked into low-interest savings and GICs.
As is clear from that article linked above, there is widespread misunderstanding around the true purpose and potential for this type of account.
Quote:
Originally posted by DesiTiger
As far as I know, this is it. Just another way for the Govt. of Canada to pull wool over people's eyes. What surprises me is how many people go giddy over the so called "tax savings" but can't get the simple math above
DT, the govt. did not pull the wool over people's eyes.
They may have been guilty of not making all aspects and possibilities of this policy clear for the general public, but I don't think the FM's intent was to deceive the general public.
I think the govt. assumed away that the banks and personal financial advisors will explain things to most people.
In fact, the only disadvantage I see of the TFSA (esp. compared to an RRSP) is the lack of exemption for withholding taxes from foreign dividend sources, like US stocks.
I'd guess that the TFSA rules will be clawed back sometime in the future.
So enjoy it while you can 
Quote:
Originally posted by Iceberg
please do not buy gic's in tfsa. what are you saving in terms of taxes. buy stocks - good dividend paying ones or mutual funds.
I won't say GICs are entirely not suited for TFSAs.
Your TFSA could have its own asset allocation, if you like.
In fact, given all the different types of securities, GICs attract the highest MTR for most people.
Therefore, once you have determined your asset allocation, it may make sense to actually put all your GICs under the TFSA to minimize taxes.
By putting dividend stocks under the TFSA, you are missing out on the dividend tax credit (assuming these are Canadian stocks).
Everyone's tax situation is different, but consider putting your GICs and savings accounts under RRSP & TFSA and your dividend stock under non-registered accounts to take advantage of the tax credit.
Quote:
Originally posted by sumjo
I do swing trading through my TFSA stock trading acc, and before I opened this type of acc, confirmed & re-confirmed with the bank that its absolutely within the rules as laid down by CRA.
Whatever gains that I make from trading doesnt invite any taxation, because the acc itself is under TFSA!!
I am pretty sure that I am not breakng any CRA rules here, OR am I missing something here???
sumjo, you are probably ok as long as CRA does not deem you to be a day trader.
The rules for day traders are different than regular retail investors.
I don't know what the TFSA rules are for those deemed to be day traders as per CRA definition.
Please look into it if you are in the grey zone with the volume of your trading.
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"Mah deah, there is much more money to be made in the destruction of civilization than in building it up."
-- Rhett Butler in "Gone with the Wind"
Last edited by: pratickm on 14-06-10 08:58:54 |
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14-06-10 08:46:44 |
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imwhoever
Senior Desi
Member since: Aug 09
Posts: 277
Location: My laptop
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As its good discussion going on, I want to clear my doubt again..
As I understood, In RRSP person get tax credit for entire amount while in TFSA only interest is tax free.
So for example, I have 5000$ extra, if I go for RRSP I will get full credit of 5000$ but if I opt for TFSA of 2% interest, I will get credit for only 100$.
If this is true why someone should go for TFSA at all?
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14-06-10 09:23:31 |
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Contributors:
ashedfc(8) benparsad(1) birentoronto(2) DesiTiger(1) ftfl(1) Iceberg(2) imwhoever(3)
newton(2) Pramod Chopra(1) pratickm(7) rajcanada(1) sudesingh(1) sumjo(1) |
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