By: Larry MacDonald
Most people will use the tax-free savings account (TFSA) to invest in conservative income investments such as high-interest saving accounts, but it appears Finance Minister Flaherty has also given daytraders and speculators a vehicle that many of them will be only too glad to use.
For signs of what’s likely to come, check out what some financial advisors are recommending in the early going. They are suggesting risk-tolerant individuals use the self-directed version of a TFSA to go after the big score; they should take aggressive risks and trade highly volatile investments such as penny stocks, options, leveraged funds, etc. in hopes of shooting the lights out.
That’s because capital gains raise contribution room in a TFSA: if a $5,000 bet turns into $30,000, the latter amount can be sheltered from tax indefinitely or withdrawn tax free, leaving the TFSA with $30,000 in contribution room. Trading in a TFSA also incurs no taxes on capital gains. The downside: if the $5,000 goes to zero, contribution room is lost, as is the capital loss to claim for tax purposes.
Jamie Golombek, managing director of tax estate and planning at CIBC, is one of the financial advisers who have suggested this approach. So too has Norbert Schlenker, a financial advisor at Libra Investment Management. As he writes on the Financial Webring discussion forum:
“There’s a feature of the TFSA that I think isn’t being taken into account here, namely that any growth in the account is a de facto permanent increase in cumulative contribution room…. It’s a free option to escape taxability in perpetuity on a larger sum…. might it be better to take a long shot, i.e. take a low percentage bet that will turn $5k into $50k (or $500k)?”
Is this something good or another one of those unintended consequences of government programs?
13 Responses to “ A TFSA investing strategy ”
For every investor who manages to find a 10-bagger, there will be ten investors turning $5k into $0 using high-risk methods. I doubt the government will be much worse off.
By CanadianInvestor on Jan 19, 2009
This seemed pretty obvious as soon as TFSAs were announced. I highly doubt that no one pointed this out in Ottawa.
My guess? The taxes lost from the few who get the big score are expected to be offset by the taxes gained by the many who lose their investment trying, but can’t write it off anymore. So this use of the TFSA will have minimal tax impact. I doubt there’s anyone who didn’t have a $5k gambling fund before but will suddenly develop one now.
By Neil on Jan 20, 2009
As the previous guy said – anyone with a logical mind knew that gambling in this fashion would be possible from day 1 and withdrawing your winnings results in extremely large contribution rooms to shield income later on. Thanks for confirming this with the post though.
Anyone know any good websites where the high risk gamblers are reporting their TFSA values to see who can hit $1 million first?
By Ray on Jan 20, 2009
I wasn’t thinking so much about the tax angle (which will likely be, as you say, a wash or net benefit to the government). I was thinking more about the possible encouragement to speculate, which I don’t think has fully sunk in yet (e.g. see Schlenker comment, “There’s a feature of the TFSA that I think isn’t being taken into account…”). But no doubt Dept. of Finance is aware of it – just like they were aware of the tax leakage and other side effects of income trusts in the beginning. Anyway, it still looks to me that a new incentive to speculate has been created: a speculator operating through a taxable account has to pay tax on his windfall; in an RRSP, he turns his capital gains into fully taxed income (on withdrawal).
By Larry MacDonald on Jan 20, 2009
Will transferring equities with an associated tax loss directly from a regular taxable account be possible (or repurchasing within TSFA before 30 day limit) be possible without violating the superficial tax loss criteria ??
By Richard Schmidt on Jan 20, 2009
Richard
One financial advisor told me he doesn’t think securities can be transferred into a TSFA.
LM
By Larry MacDonald on Jan 21, 2009
Qualified investments for the purposes of making a contribution into an RRSP or TFSA are governed by the same rules. See IT320R3 for the specific answer. Therefore whatever you can contribute into a self-directed RRSP should also be eligible as a TFSA contribution. Clearly, qualified equities (securities, both private and public) fall under this category.
By Phil S on Feb 7, 2009
Richard – you can transfer in kind from your existing investment account to your TFSA.
By Anne on Feb 13, 2009
So do Investors think they should put their higher risk/ higher earning investments in a TFSA, or safer investments such as GICs which earn income at the highest tax rate? Some say put in the GICs as you get the biggest tax reduction, but who wants to earn 3 or 4% in a GIC?
By [URL="http://www.tsfinancial.ca"]Myles Rempel[/URL] on Jun 9, 2009
I still belive the TFSA should be used for a high income tax inefficient investment. You get the most benefit this way from the taxation policy with the least amount of risk.
Here’s why:
http://investcanada.blogspot.com/2009/08/tfsa-tax-free-savings-account-best-tfsa.html
By Smac20 on Aug 3, 2009
Does a transfer of stock into a TFSA trigger a capital loss (outside the TFSA ) if you do it when the stock is lower than your purchase price?
By Bob on Oct 9, 2009
Bob
I understand that one cannot claim a capital loss on stocks transferred into a TFSA. One should sell them first to get the capital loss and then transfer the cash in.
By Larry MacDonald on Oct 9, 2009