Back to Home PageWelcome Guest! Register | Login | Home | Contact Us | Site Map | Advertise | FAQ | Search
Canadian Desi
    Charcha


        
  Canada Immigration Forum > About Canada > Accounting and Taxation > Taxpayers hit with penalties on tax-free savings accounts
Last Post | Newest Post
 
< [ 1 ] [ 2 ] [ 3 ] [ 4 ] >

Taxpayers hit with penalties on tax-free savings accounts




pratickm
Global Moderator
Member since: Feb 04




Posts: 2831
Location: Toronto


Quote:
Originally posted by imwhoever
As I understood, In RRSP person get tax credit for entire amount while in TFSA only interest is tax free.


Contribution into RRSP provides a tax deduction, not a credit.
Under TFSA, the contributions do not provide any tax deductions or credit.
Any returns inside the TFSA (not just interest, but all types of returns) are tax-free.
In addition, all withdrawals from the TFSA are tax free.
That is the the key difference, unlike RRSP.
Withdrawals from RRSP are not tax-free (not considering the HBP & Higher Learning Plan as withdrawals)
Quote:

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?

Comparing an RRSP and TFSA is not that straightforward.
There are many factors - current and future - that have to be taken into account before comparing.
For instance, don't be blinded by the tax deduction you get for RRSP contribution today.
It is merely a tax deferral - the govt. will get back its tax on the contribution once the RRSP is collapsed, either by un-registering or through RRIF income.
RRSP withdrawals will also induce a clawback of OAS, which TFSA withdrawals will not (again, a key difference).
You have to take into account your estimated MTR during retirement to determine if RRSP contribution or TFSA contribution is more profitable for you.
And for the purposes of calculation, if you are estimating that TFSA is going to return you 2%, you should assume the same for your RRSP returns as well.
You should also use 2% as the "risk-free" rate for discounting future cash flows from RRSP and TFSA for calculating present value of both types of investments.

-----------------------------------------------------------------
"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"

 
Post ID: 165455 14-06-10 09:35:26
Report Abuse
imwhoever
Senior Desi
Member since: Aug 09




Posts: 277
Location: My laptop


Sorry for being so dumb (much complicated than I thought), but what is OAS and MTR?
And if I only look for tax purpose and not return then?
Also RRSP withdraws are non taxable for first time home buyers and if my spouse who is not working can withdraw within personal limit next year,isnt it?


 
Post ID: 165458 14-06-10 10:06:22
Report Abuse
newton
Senior Desi
Member since: Mar 07




Posts: 169
Location: Toronto



Lets take an example say if I contribute $5000 to a RRSP and a TSA.

Here is what will happen


RRSP - Tax deduction at 20% tax bracket - $1000 refund.

I invest $5000 in Apple stock which quadruples to $20000 in 30 years. When I withdraw the $20,000 I get taxed at the lowest tax rate (say 20% at that time) which is $4000.00

Lets say the $1000 refund earns me a compounded 5% over 20 years. So I have $2653.00 from that.

My total gain on $5000 contribution is $2653+$16,000 = $18,653

TSFA

I contribute $5000.00 I get no tax deduction
I invest $5000 in Apple stock which qudruples to $20000 in 30 years. I sell the stock and withdraw $20,000 with no tax liability.

SO RRSP gain = $18653
TSFA gain = $20,000

SO it seems like the TSFA is a good deal. Please correct me if I am wrong.


 
Post ID: 165460 14-06-10 10:17:20
Report Abuse
ashedfc
Senior Desi
Member since: Jun 10




Posts: 2153
Location: GTA


Quote:
Originally posted by imwhoever

Sorry for being so dumb (much complicated than I thought), but what is OAS and MTR?
And if I only look for tax purpose and not return then?
Also RRSP withdraws are non taxable for first time home buyers and if my spouse who is not working can withdraw within personal limit next year,isnt it?



OAS is Old Age Security - Its the money paid to pensioners monthly, & its based on income. If one has a higher income, then govt. starts reducing the amount of OAS benefit, at a certain income the OAS becomes zero. Any withdrawal from TFSA, does not add in calculating the income for OAS benefit. Does that clarifies. You can withdraw a million from TFSA, & still qualify for OAS benefit. And if this withdrawal is from RRSP, than it will be added to your annual income for OAS calculation. I know a lot of seniors who are getting OAS clawback due to income from various sources.

MTR is Marginal Tax Rate : Its the tax rate on the top dollar income. For example if you make 50k income & are in lets assume 31% tax rate, then any dollar extra you make will be taxed at 31% (till the next rate kicks in). So, you will receive only 69 cents, & 31 cents will be taxed on the dollar.

For RRSP withdrawal, your spouse can withdraw only from her RRSP, whatever she withdraws becomes her income, & she will pays on whatever tax rate is applicable (within the personal limit it will be zero, & if it exceeds it will be as per the MTR).

Home buyers withdrawal is just as a support to create money for new home buyers. This money has to be returned back into the RRSP over 15 yrs time, or else taxes will have to be paid.


 
Post ID: 165461 14-06-10 10:21:54
Report Abuse
ashedfc
Senior Desi
Member since: Jun 10




Posts: 2153
Location: GTA


Quote:
Originally posted by newton


Lets take an example say if I contribute $5000 to a RRSP and a TSA.

Here is what will happen


RRSP - Tax deduction at 20% tax bracket - $1000 refund.

I invest $5000 in Apple stock which quadruples to $20000 in 30 years. When I withdraw the $20,000 I get taxed at the lowest tax rate (say 20% at that time) which is $4000.00

Lets say the $1000 refund earns me a compounded 5% over 20 years. So I have $2653.00 from that.

My total gain on $5000 contribution is $2653+$16,000 = $18,653

TSFA

I contribute $5000.00 I get no tax deduction
I invest $5000 in Apple stock which qudruples to $20000 in 30 years. I sell the stock and withdraw $20,000 with no tax liability.

SO RRSP gain = $18653
TSFA gain = $20,000

SO it seems like the TSFA is a good deal. Please correct me if I am wrong.



You are absolutely correct. And while you are holding AAPL stock for 30 yrs, you can also sell covered call on AAPL & make more money. Since this activity is in a TFSA - all the gains are Tax Free.


 
Post ID: 165462 14-06-10 10:26:45
Report Abuse
imwhoever
Senior Desi
Member since: Aug 09




Posts: 277
Location: My laptop


Thank you everyone, now much clear. I am gearing up before going to bank/finance advisor. (and its always good to be dumb here than dumb to bank person. :p )

 
Post ID: 165470 14-06-10 11:31:33
Report Abuse
rajcanadaMember of Administrators
Admin
Member since: Jul 03




Posts: 2713
Location: Kitchener, ON


As per the rules, whatever amount is withdrawn from TFSA can be put back into TFSA only next year.

Why are TFSA transfers from one institution to another being penalized and counted as new contributions? What is the use having a facility such as transfer of TFSA if in fact you are going to be penalized if you use it. On top of that many banks are also charging fees for transfer.

-----------------------------------------------------------------
Give free food http://www.thehungersite.com ||

 
Post ID: 165472 14-06-10 11:36:02
Report Abuse
ashedfc
Senior Desi
Member since: Jun 10




Posts: 2153
Location: GTA


Quote:
Originally posted by imwhoever

Thank you everyone, now much clear. I am gearing up before going to bank/finance advisor. (and its always good to be dumb here than dumb to bank person. :p )



Because the gains in a TFSA is tax free, I would recommend you go for investment choice with more growth potential, than a GIC's (as its being done by majority of TFSA account holders). Or may be if you a high risk tolerance, than buy Gold or Precious metal in your TFSA account.

This fund can be purchased in a TFSA account (for as less as $25 per month), http://www.theglobeandmail.com/globe-investor/funds-and-etfs/funds/summary/?id=68809

Visit me at http://www.edfc.ca" rel="nofollow">LINK


 
Post ID: 165473 14-06-10 11:38:26
Report Abuse
ashedfc
Senior Desi
Member since: Jun 10




Posts: 2153
Location: GTA


Reasons to Own Gold. If held in a TFSA all the gains are tax free.
Read this link http://www.sprott.com/docs/Reports/reasons_to_own_gold.pdf

For more info visit http://www.edfc.ca" rel="nofollow">LINK


 
Post ID: 165474 14-06-10 11:41:37
Report Abuse
pratickm
Global Moderator
Member since: Feb 04




Posts: 2831
Location: Toronto


Quote:
Originally posted by newton
RRSP - Tax deduction at 20% tax bracket - $1000 refund.

I invest $5000 in Apple stock which quadruples to $20000 in 30 years. When I withdraw the $20,000 I get taxed at the lowest tax rate (say 20% at that time) which is $4000.00

Lets say the $1000 refund earns me a compounded 5% over 20 years. So I have $2653.00 from that.

My total gain on $5000 contribution is $2653+$16,000 = $18,653

For simplicity, you should assume the $1,000 refund is plowed back into the RRSP as well.
If you don't make that assumption, then you have to account for the capital gains (and dividend) taxes on your non-registered investment.
Once you account for the taxes on the $1,000 "refund", the benefit of the RRSP reduces further.
Of course, there is a big assumption that your MTR in retirement will be so much lower than current (20% vs. 40%).
That may not be the case.
The higher you assume the retirement MTR to be, the less is the benefit of RRSP contribution.

Quote:
TSFA
I contribute $5000.00 I get no tax deduction
I invest $5000 in Apple stock which qudruples to $20000 in 30 years. I sell the stock and withdraw $20,000 with no tax liability.

SO RRSP gain = $18653
TSFA gain = $20,000

SO it seems like the TSFA is a good deal. Please correct me if I am wrong.

To be fair, you should discount both values down to present value since you are talking about a future value.
The $1,000 tax "refund" you receive today should be valued higher than the $1,000 you will receive after 30 years from either the RRSP or the TFSA.
Which is why it's important to assume that the $1,000 is rolled into the RRSP and not kept outside it.

Your conclusion is valid, though.
I think in this case the TFSA will beat the RRSP.

-----------------------------------------------------------------
"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"

 
Post ID: 165476 14-06-10 11:46:26
Report Abuse
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)  
< [ 1 ] [ 2 ] [ 3 ] [ 4 ] >
 
Show Printable version
Send this page to a friend
Add to favorites
 


 
Web
CanadianDesi
Please Contribute!
Write an Article
Send Community News
Create Photo and Video Albums
Submit Good Pictures
List Useful Websites
Post Jobs
Submit Events
List for FREE!
Businesses
Classifieds
Social Organizations
Religious Places
Employment Agencies
Email Page
Your Email
Friend\'s Email

Advertise Contact Us Privacy Policy and Terms of Usage FAQ
Canadian Desi
© 2001 Marg eSolutions


Site designed, developed and maintained by Marg eSolutions Inc.