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One of the commentors at Canadian Capitalist points out:

Now that I’ve thought about it, not being able to claim capital losses for stock held inside the TFSA is really of no consequence. Capital losses can only be applied against capital gains. You’re just reducing the tax hit of capital gains, you’ve already lost the money. TFSA does the same thing, and better by not taxing you on capital gains, period. Having a capital loss outside the TFSA is only useful if you have capital gains outside the TFSA. canadian capitalist

The TFSA is the mirror image of RRSPs - contributions are made with after-tax dollars but withdrawals are tax-free. But TFSAs have an interesting twist because any withdrawal from the account creates an equal amount of contribution room. This would allow us to save for an automobile or a dream vacation in a tax efficient manner and replace the savings in the future. How great is that? canadian capitalist

Great comments too. Including this one “If your non-registered portfolio consists of some secure investments like GICs and some stocks, you may as well put as much of your low risk, interest-earning investments in the TSFA as you can and save a few bucks.”

This because you cannot write off losses on investments inside the tax free savings accounts.

On the other hand, where you have assets which did not cost much but have significant upside you would be nuts to pay the effective 25% capital gains tax you’d incur leaving them outside the scheme.

The big question for many investors will be how to get lots of money into the tax free savings accounts as having the money there will allow investment in both high and low risk adventures.

“The registered savings plan, while not deductible from income, was quickly applauded as ‘very good’ for middle-class Canadians and for the economy by the head of a national tax watchdog organization.

“It will reward people that save their income and it will do that by removing all the taxes on investment that currently exist, that is tax on interest income, dividends, and capital gains and it’s a pro-growth measure,’ said John Williamson, federal director of the Canadian Taxpayers Federation.” national post

The logic, of course, is that the money people put into the tax free savings account will already have been taxed at least once. Why should it be taxed again?

“The government has unveiled the biggest change to the way Canadians save since RRSPs were introduced in 1957, but it is a shadow of the capital gains rollover program the Conservative Party pledged in its election platform two years ago.And while eyes may have been drawn to the new Tax-Free Savings Account, the government also quietly announced that it was raising the taxes individuals pay on dividend income held outside the new investment vehicle and RRSPs.

“I think it’s a joke if this is their policy vis-a-vis the capital gains rollover,” said Jeff Rubin, chief economist at CIBC World Markets. “What does it mean for capital markets? Insignificant.” financial post

At the outset, with a $5000 cap this program is probably insignificant. However, over four or five years the contribution room will increase to 20-25K and, more to the point, the money already in the program will continue to be tax free with unlimited withdrawals and the ability to use it as collateral.

Using the RSP contribution room first to reduce tax payable makes sense; but the Tax Free Savings Account invested in high yield (and therefore high risk) instruments may also make sense. Of course the kicker is that capital losses in the TFSA will not be deductible. However, well structured investments should be able to minimize the downside.

Using RSPs and the TFSA’s will offer lots of fun. But the potential capital gains in the TFSA, the steady but unineteresting bonds in the RSP. One is locked in until your bracket drops, the other is a way of making sure you never pay any tax on capital gains.

Now, for the mega investors betting 100k a time, this is chump change. But for the little guys who want to buy Consolidated Moose Pasture at .22 because it’s “going to the moon” this sort of account will be a huge benefit.

Watch for brokerages to jump in the game.

“Instead, the budget emphasizes the long-term advantages. A middle-income earner who saved $200 a month, and earned 5.5 per cent from a blend of capital gains, dividends and interest income, would save $48,000 over 20 years and have $39,525 of tax-free investment earnings, about $11,045 more than if he or she had to pay tax. The budget’s example assumes a world without price inflation and rising contribution limits.

“I would always advise high-income clients to use a registered retirement savings plan (RRSP) first,” said tax accountant Nancy Belo Gomes. “You want the tax deduction now while you are in a high tax bracket. Then maybe you could put your refund into the tax-free savings account.” the star

“The new account will not have a purpose designated by law, and not all of the rules that come with registered savings accounts for retirement, education and, starting this year, the disabled.So you could have a single account to save for a car, home, emergency or wedding account or to pace spending from an inheritance, lottery win or fixed-income pension plan.

Savers will not enjoy a refund of tax on income they deposit to their tax-free accounts, and they will be limited to saving $5,000 a year, with periodic adjustments to keep pace with rising prices and incomes.

But the savers will never pay taxes on their investment income, or see federal government pensions or tax credits clawed back when they make withdrawals. This will allow savings to grow faster and go further in world of low interest rates.

The accounts could be willed to a spouse upon death, or the assets transferred to the spouse’s account. High-income earners will get to split investment income with a low-income spouse.

If the saver does not use all $5,000 of the annual contribution limit, he or she will get to use it later, and will be able reuse contribution room after making withdrawals. toronto star”

The new Tax-Free Savings account (TFSA) will help lower-income Canadians save for the future, said the Investment Funds Institute of Canada (IFIC), in response to the federal government initiative announced today.

“IFIC has been suggesting a very similar program to the government over the past two
years,” said Joanne De Laurentiis, president and CEO at IFIC. “The mutual fund industry has long taken the stand that the federal government should help Canadians save for
themselves and be less reliant on government programs in the years ahead. The TFSA
takes Canadians down that road,” said De Laurentiis, in a release. Investment Funds Institute of Canada

How the Tax-Free Savings Account Will Work

• Starting in 2009, Canadian residents age 18 or older will be eligible to contribute up to $5,000 annually to a TFSA, with unused room being carried forward.
• Contributions will not be deductible.
• Capital gains and other investment income earned in a TFSA will not be taxed.
• Withdrawals will be tax-free.
• Neither income earned within a TFSA nor withdrawals from it will affect eligibility for federal income-tested benefits and credits.
• Withdrawals will create contribution room for future savings.
• Contributions to a spouse’s or common-law partner’s TFSA will be allowed, and TFSA assets will be transferable to the TFSA of a spouse or common-law partner upon death.
• Qualified investments include all arm’s-length Registered Retirement Savings Plan (RRSP) qualified investments.
• The $5,000 annual contribution limit will be indexed to inflation in $500 increments.

2008 Budget papers

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  The CPC has introduced a Tax Free Savings Account in its February 25, 2008 Budget. The provisions will not kick in until 2009 but it may be time to start planning how you might use the Tax Free Savings Account.

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