Million Dollar Journey has a straightforward summary of the proposed changes, which target returns on over-contributions, returns on prohibited investments, asset transfers into TFSAs, and tax room created by the above strategies.

Tim Cestnick says “Most Canadians won’t be impacted by the changes” and offers 8 ways to legally exploit your TFSA.

Michael James points out that a 100% tax on returns derived from over-contributions is a good thing because it prevents people from taking aggressive risks (i.e. making over-contributions and investing them in risky securities in hopes of earning more than the 1% a month penalty on over-contributions).

Canadian Financial DIY explains, with the help of the Financial Webring thread, just how the asset swaps took advantage of the TFSA (as the asset swapper gets to choose any price in the day’s trading range after the fact, he can deliberately choose a low price when stock leaves the TFSA and a high price when the stock returns)

Canadian Capitalist asks why ban asset swaps into TFSAs – seems to be overkill.

Jonathan Chevreau was onto the TFSA swap strategy way back in January.

Sacha’s TFSA has grown from $5,000 to $12,000 in less than a year – and without any fancy tax planning.

Preet and Four Pillars on ING Direct’s offer to get 2010 TFSA contributions in early (and $25 referral bonus)

2. Are we there yet? Two-thirds of investment managers cite stability of the U.S. real estate sector as the No. 1 indicator they watch for signs of a recovery in financial markets. Unfortunately, the decline in house prices has been accelerating, lately.

3. TFSAs are for the Geritol set. A third of Canadians over 65 now have a Tax Free Savings Account. Only a quarter of 55- to 64-year-olds and a sixth of Canadians under the age of 45 have one.

4. Great, just what we need — government contributing to unemployment in midst of recession; Ontario’s 9% increase in minimum wage “will end up hurting the very people it is intended to help.”

5. Minimum wages by province – chart.

6. Hurry, just 3 days left to get a quick answer to that tax question. H&R Block Canada has declared March 30 to April 4 National Tax Advice Week and are offering Canadians the opportunity to have their tax questions answered by a professional.

7. When it comes to taxes, one of the “biggest mistakes people make is thinking they don’t qualify for a credit when actually they do.”

8. Winners of stock market competition get $2,000 scholarship. John Bogle would not approve.

One might initially be puzzled by taxes and inflation being the greatest worry for those contemplating their golden years. But then, recent coverage of government budgets reminds us of a possible explanation. When governments run gargantuan deficits to finance massive stimulus and spending packages, citizens begin to fear it means higher taxes down the road.

The wisdom of the crowd may prove prophetic. As government deficits get bigger and bigger, so does “regulatory risk,” i.e. the pressure to change the rules and regulations in the middle of the game.

Take the decision to contribute to a tax-deferral plan, like registered retirement savings plans. High income persons may see them as worthwhile because their tax rate in retirement is expected to be lower. But that assumes marginal tax rates stay where they are. What if they ratchet upward so by the time one gets to retirement, tax rates are higher than the rates at time of contribution? The deferral is not so great.

Don’t forget the other government tax called inflation. Governments confronted with massive debt problems have been known to inflate their way out of those burdens. So even if statutory tax rates and laws remain unchanged, saving for retirement could be tripped up by real returns coming in below required levels, or even negative.

Funny, it seems, the greatest fears about the future originate with government yet people continue to expect it to solve all their problems. Maybe if they stopped expecting so much from their politicians it would be a little easier to enjoy the fruits of one’s labour.

Appendix: Other considerations:  as funding pressures mount on government, could withdrawals from tax-free savings accounts become taxable?  Could capital gains and dividend income lose some of their preferential tax treatment?

1. Contribute to both a TFSA and RRSP if you have the money.

2. Make an RRSP contribution and put the tax refund in your TFSA.

3. Invest in a TFSA first if your present and future tax rates will be similar.

4. Invest in a TFSA first if you expect to be in a higher tax bracket than present when you need the money.

5. If your tax rate is above the expected rate when you need the money, make an RRSP contribution first.

6. Contribute to an RRSP if you plan to borrow from the RRSP under the Home Buyer’s Plan or Life Long Learning Plan.

7. If your RRSP, once converted to a RRIF, will result in mandatory withdrawals that are high enough trigger claw back of government benefits such as Old Age Security, invest in a TFSA. 

He had a contrarian perspective. “I just don’t see the TFSA as such a big deal right now,” he said. Do the math: “If you invest $5,000 in a TFSA, and the money is placed in a low-risk GIC paying 5% (at highest rates) for 12 months, then you get $250 of interest at the end of the first year. That is tax free, so you save $125 (in the highest 50% tax bracket) in the first year.” 

Asks Milevsky: “Hundreds of news articles and stories over the equivalent of a nice dinner and a movie for two?” Some will say that you can get more if you invest in stocks at 8% or more. But he rejects using equity returns because they can just as easily be -8% in 2009. The true comparison requires the risk-free interest rate, in his view.

For such a small benefit “why not give every Canadian a tax credit for $125 and save the financial institutions, their I.T. departments and the rest of us the implementation hassle?” Milevsky suggests (i.e. avoid more bureaucratic costs cutting into what Canadians earn on their savings).

“Sure, maybe in 5 years from now the sums of money I can shelter will be large enough and the compounding impact will be much greater so that the tax savings becomes worth the hassle of going to the bank, standing in line, keeping track of yet more paperwork, opening an account, etc,” Milevsky admits.

But … “let’s see how this program changes over time. Tax policy can be just as fickle as financial markets. What limits will politicians impose on the TFSA by the time this becomes valuable?” (i.e. more regulatory risk for Canadian savers).

I’m told there are two tables listing information from banks, mutual funds, brokerages, and insurance companies on TFSA administration fees, withdrawal fees, minimum investments, as well as a chart of TFSA incentives. As mentioned in my column on TFSAs, Buyer Beware, another website, RedFlagDeals.com plans to provide fee data too — but not yet so far .

One avenue for the aggressive investor is penny stocks, or the juniors. At least they are straightforward vehicles compared to commodity futures, stock options, and triple-leveraged exchange-traded funds.

And their time may have come. The best time to speculate in high flyers is when stock markets are rallying out of a bearish phase, as could be happening now — or should be happening within the next year or so. They’re still beaten up, yet a rising tide will lift all boats (except for my Nortel stock, of course). And many of these little boats will really fly with a good tailwind (but can also sink when they spring a leak – need I mention Nortel again?).

There is a front-page column by Dave Skarica in the latest issue of the Investor’s Digest of Canada with many small-cap suggestions, mostly junior mining operations “that possess ounces in the ground in reserves and are in, or going into, production.” Picking at random from the article, three of the recommendations were (do your own due diligence first, of course):

Paramount Gold and Silver
Aberdeen International
Silverstone Resources

Investor’s Digest has been published since the 1970s and is available by subscription, at newsstands, and online through adviceforinvestors.com.

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?

Other complaints could have been raised. Two are what economists call “perverse incentives” and “regulatory risk.”

Perverse incentives refer to the fact government initiatives often come with unintended consequences. For example, many economists say the OAS, GIS and other income-support programs for elderly persons reduce the incentive for those in their working-age years to work, save and generally be a productive member of society. You can always rely upon government support programs for at least a minimum standard of living in your old age. Or if you want a bit more, you can save but keep it under the amount that would claw back old-age benefits. And if you have saved too much, retire or semi-retire in your 40s or 50s and melt down your registered plans until you don’t face any clawbacks or the prospect of receiving retirement income in the higher tax brackets after 65.

The TFSA adds another plank to the edifice from which such unintended effects come. Ironically, one of the primary reasons for its creation was to address the disincentive to save for retirement, especially in the case of low-wage earners. Perhaps in time we will see how the TFSA creates its own set of unwanted side-effects and requires yet another government program to patch up the leaks. The cost of the bureaucracy seems to just keep feeding on itself, taking an ever greater cut from our savings.

Regulatory risk begins with people and companies undertaking actions on the assumption government rules and regulations continue unchanged into the future. That doesn’t always happen. Governments, for various reasons, often end up changing the rules of the game in midstream or just before the waterfall comes into view.

With registered plans such as RRSPs, RESPs, and TFSAs, this risk is ever present.  Take the decision to contribute to an RRSP. High income persons may see it as worthwhile because their tax rate in retirement will likely be lower — assuming tax rates stay the same. Fifteen years from now when they retire, rates could be higher and wipe out much of the value to deferring taxes.

Many persons will now plow money into the TFSA believing they no longer have to worry about clawbacks or taxes in their old age. But some retirement experts say the loss of tax revenues from the TFSA could become significant in a few years and prompt the government to introduce changes to recoup revenues. Who knows, maybe the changes could include legislation that decrees taxation of some percentage of the amount withdrawn annually from a TFSA.

True, TFSA accounts legally cannot offer tax-free saving until 2009 but ING Direct will pay bonus interest equal to “the interest your account earns between Oct. 4 and December 31,” which will be more than enough to cover taxes, they say.

I found out earlier this week about the offer when ING Direct mailed me a circular (I have an account with them). I don’t want to sound like an ad for them, but their savings account has always been one of the better paying ones (government insured and with no account fees) and comes with the convenience of an electronic link to my Canadian bank account and online broker. So, it’s a no brainer for me to sign up for their TFSA.

Some of the financial institutions taking pre-registrations for TFSA accounts require visiting a local branch or calling an 800 number. ING Canada offers the convenience of registering online at http://www.hugthetaxman.ca/ (like the address name — ING Direct always keeps things humorous, another thing I like about them).

Looking at the site now, I see they make it even easier for ING Direct customers like me to sign up. Hey, let me do it now…. there done! Took about 7 clicks of the mouse and a minute …. cross it off the list of things to do.