Taxpayers hit with penalties on tax-free savings accounts
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Posted on: 13-06-10 13:38:07
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
Quote:That is a very appropriate description, Pramod ji.
Originally posted by Pramod Chopra
However, I believe that the name should have been TAX FREE SAVINGS PLAN
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:DT, the govt. did not pull the wool over people's eyes.
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
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:I won't say GICs are entirely not suited for TFSAs.
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.
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:sumjo, you are probably ok as long as CRA does not deem you to be a day trader.
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???
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"
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$.
If this is true why someone should go for TFSA at all?
Quote:
Originally posted by imwhoever
As I understood, In RRSP person get tax credit for entire amount while in TFSA only interest is tax free.
Contribution into RRSP provides a tax deduction, not a credit.
Under TFSA, the contributions do not provide any tax deductions or credit.
Any returns inside the TFSA (not just interest, but all types of returns) are tax-free.
In addition, all withdrawals from the TFSA are tax free.
That is the the key difference, unlike RRSP.
Withdrawals from RRSP are not tax-free (not considering the HBP & Higher Learning Plan as withdrawals)
Quote:Comparing an RRSP and TFSA is not that straightforward.
So for example, I have 5000$ 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?
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.
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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"
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?
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.
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. 
)
