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  Canada Immigration Forum > About Canada > Accounting and Taxation > Taxpayers hit with penalties on tax-free savings accounts
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Taxpayers hit with penalties on tax-free savings accounts




ashedfc
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Member since: Jun 10




Posts: 2153
Location: GTA


Quote:
Originally posted by pratickm

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.



Love your calculation. That is exactly what I recommend to my clients, when they ask for TFSA or RRSP. The best option is Why not both.
Do an RRSP, then get the tax refund, & use the refund to put in an TFSA. In whichever year, you have less income, withdraw from RRSP (so tax implications are less) & put it in a TFSA.


 
Post ID: 165478 14-06-10 11:50:54
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newton
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Member since: Mar 07




Posts: 169
Location: Toronto


Quote:
Originally posted by pratickm


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.




I do not see the need to discount to PV since I have taken into account the FV of the $1000 by reinvesting it at at realistic rate of return. So what I am doing is comparing the FV of both. Of course the FV of $1000 which is $2653 will also be taxed so that reduces the value of the RRSP further.....am I missing something?


 
Post ID: 165483 14-06-10 12:14:46
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pratickm
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Member since: Feb 04




Posts: 2831
Location: Toronto


Quote:
Originally posted by newton
I do not see the need to discount to PV since I have taken into account the FV of the $1000 by reinvesting it at at realistic rate of return. So what I am doing is comparing the FV of both. Of course the FV of $1000 which is $2653 will also be taxed so that reduces the value of the RRSP further

Correct, that's what I said in my post above that the returns of RRSP would reduce once you account for the taxes on the non reg. investment.

Even though in this example, the TFSA comes out ahead of the RRSP, this is a static example of one year's contribution only.
If you take into account that typically RRSP room is more than TFSA for most people (and will likely continue to be so) and if you assume that MTR in retirement is so much lower than during the working years, it would be interesting to see what the results are.
There are many variables in that case, though, like OAS clawback etc.
For folks in their early 20s, the TFSA offers a huge advantage if they religiously contribute the maximum every year for their entire working lives.
It may end up beating the RRSP on an after tax basis.
Which is also why I think the program will either be clawed back to dissolved at some point in the future.

-----------------------------------------------------------------
"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 12:32:03
Post ID: 165486 14-06-10 12:27:52
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ashedfc
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Member since: Jun 10




Posts: 2153
Location: GTA


TFSA is for sure a better way of accumulating assets in a tax free way.
For example. $5000 every year starting 2009. Lets assume a person age 40years contributes $5000 every year starting 2009, in a T8 series fund. By the time the individual reaches 65 years (retirement age), assuming zero % (off course returns will be more, but lets take zero %). Lets ignore the contribution limit increase (inflation adjusted) in the future.
At age 65 he has $125000 in the TFSA, thereafter, he can withdraw T8 $835 every month tax free as his pension, & he still qualifies for OAS, GIS (because the income from TFSA does not affect the Govt. benefits).
If the returns over next 25years are more than zero, than the calculation of monthly income goes higher.
It makes absolute sense to use the TFSA route to create wealth. We have been using T8 Tactical funds with a Bond & Equity exposure to generate growth in TFSA accounts.

Also if the money for TFSA is from a Line of credit, then there are monthly income payments from TFSA accounts, which is used to service the interest of the Line of credit.


 
Post ID: 165667 16-06-10 11:15:23
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pratickm
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Member since: Feb 04




Posts: 2831
Location: Toronto


Quote:
Originally posted by ashedfc
It makes absolute sense to use the TFSA route to create wealth. We have been using T8 Tactical funds with a Bond & Equity exposure to generate growth in TFSA accounts.

I don't see the benefit of T funds for a non-taxable account.
The higher distributions than the regular units don't come free - you are gradually eroding NAV to get those higher distributions.
And the sustainability of the distributions are doubtful in the first place.
Since you are never going to pay tax in a TFSA regardless of the type of income received, why can't this be done as a simple conceptual SWP instead of a complicated T series?
And since CRA does not allow a switch between a non-registered investment holding regular units of a fund to a TFSA holding T units, it won't buy you any deferred capital gains either.
I guess people are just looking at the nominal distribution values without digging deeper and seeing where the distributions are coming from (" money out of thin air" ).

Quote:

Also if the money for TFSA is from a Line of credit, then there are monthly income payments from TFSA accounts, which is used to service the interest of the Line of credit.

The interest won't be tax deductible, right?
So if someone has an LOC and is itching to invest, why not do this non-registered and write off the interest instead of reducing the compounding effect of a TFSA?

-----------------------------------------------------------------
"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 16-06-10 15:49:47
Post ID: 165700 16-06-10 15:48:33
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ashedfc
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Member since: Jun 10




Posts: 2153
Location: GTA


There are lots of ways of financial creativity using a TFSA.
T8, T6 or even SWP it all possible, any withdrawal erodes value (either by reducing the No. of units or by reducing the value of units).
So, it comes to the same, is the growth more than income or less than income.
At age 65, even if there is a value adjustments by withdrawing more money, how long does a person lives. He is funding his pension (at least the account is doing its intended purpose).

Most pensioners are either having negligible income, or are getting clawback for benefits.
TFSA withdrawal or distribution solves that purpose.


 
Post ID: 165712 16-06-10 17:37:31
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ashedfc
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Member since: Jun 10




Posts: 2153
Location: GTA


As per patrickm
"The interest won't be tax deductible, right?
So if someone has an LOC and is itching to invest, why not do this non-registered and write off the interest instead of reducing the compounding effect of a TFSA?"
-------------

But all the capital gains, dividend, etc in a TFSA is Tax free,
as compared to a non-registered account, where there is interest tax deductibility, but gains are taxable.


 
Post ID: 165713 16-06-10 17:39:57
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ftfl
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Member since: Jul 06




Posts: 2335
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And finally they have woken up.....Mmmmm.... That gives everyone a chance to...
The Honourable Keith Ashfield, Minister of National Revenue, and the Honourable Jim Flaherty, Minister of Finance, issued the following statement today:

June 25, 2010The Government of Canada would like to provide an update on the recent administrative concerns expressed by some Canadians regarding the Tax Free Savings Account (TFSA).

2009 was the first year of the program and the response to the TFSA has been overwhelmingly positive. Approximately 4.7 million Canadians have taken out a TFSA since the program was initiated.

Our government recognizes that there was some genuine confusion about the rules for the TFSA in the first year. We understand that it may take time for some Canadians to learn about the program and for some financial institutions to properly inform their clients about this product.

The Government of Canada confirms that for the 2009 filing year, the first year of the program, we have taken the decision to be as flexible as possible in cases where a genuine misunderstanding of the TFSA contribution rules occurred. Our intention is to review each situation on a case-by-case basis and, where appropriate, waive taxes on excess contributions for this year.

For instance, individuals who used their TFSA as a regular banking account in 2009, making deposits and withdrawals on a frequent basis, or who have transferred funds between TFSAs at different institutions, but whose net contributions never exceeded the 2009 limit of $5000, may not be required to pay the tax on excess contributions for this year.

Of the nearly 4.7 million Canadians who have a TFSA, less than 2% (70,000) have recently received a letter from the Canada Revenue Agency asking to provide further information about their accounts before June 30, 2010. We have decided to extend this deadline from June 30 to August 3, 2010, to allow ample time for Canadians to provide the necessary information about their accounts.......
..........

http://www.cra-arc.gc.ca/whtsnw/tms/jntsttmnt-eng.html

Freddie.


*EDIT: http://www.tfsa.gc.ca/thingstoknow-eng.html
http://www.moneysense.ca/2010/06/20/apply-for-waiver-of-tfsa-over-contribution-penalties/


 
Last edited by: ftfl on 01-07-10 00:59:19
Post ID: 166795 01-07-10 00:54:48
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birentoronto
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Member since: Sep 08




Posts: 122
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I have 10,125 in my TFSA (accumulated over 2 years plus interest).

If I withdraw it all, in 1st Nov 2010 - can I put back 10,125 back or just 10,000 in 2011?

Thanks


 
Post ID: 173986 15-10-10 23:06:17
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pratickm
Global Moderator
Member since: Feb 04




Posts: 2831
Location: Toronto


Quote:
Originally posted by birentoronto
I have 10,125 in my TFSA (accumulated over 2 years plus interest).

If I withdraw it all, in 1st Nov 2010 - can I put back 10,125 back or just 10,000 in 2011?
Thanks

After Jan 1st, 2011, you can put back $10,125 + 5,000 = $15,125 into your TFSA.
You must not add any contributions prior to 1st Jan 2011.

-----------------------------------------------------------------
"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: 173995 16-10-10 09:12:39
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