Is a TFSA always worthwhile?

[Shakespeare]

The situation: withdrawal phase, with RRSP or LIF funds supplementing pension. Funds for the TFSA can not be found without either paying CG tax on non-registered funds or paying income tax on RRSP/LIF withdrawals. Base TFSA with emergency fund already set up. "New Car" funds can be found by paying CG tax on non-registered funds. "Emergency Health" funds can be found by withdrawing from the RRSP and claiming the medical expenses credit.

Convince me that contributing more to the TFSA is worthwhile.

[IdOp]

A quick thought. I think the setup you describe eliminates the following suggestion, but perhaps it was not intended to.

The idea is that if there are any nonregistered investments generating distributions that are automatically reinvested (e.g., mutual funds) then they could be taken in cash and put in a TFSA.

Again, this may not apply to you and that's why you excluded it in your assumptions.

[queerasmoi]

It could also be a place for "surprisingly low expense" months - if you get your pension and mandatory RRIF withdrawal and it's more than you need to spend, putting it in the TFSA wouldn't hurt.

[Shakespeare]

The idea is that if there are any nonregistered investments generating distributions that are automatically reinvested (e.g., mutual funds) then they could be taken in cash and put in a TFSA.

All current unsheltered cash flow is used for expenses. So only money on which tax is due can be put in the TFSA.

if you get your pension and mandatory RRIF withdrawal and it's more than you need to spend, putting it in the TFSA wouldn't hurt.

If mandatory RRIF/LIF withdrawals exceed living expenses, they can be put into the TFSA. But that won't happen for lotsa years, and TFSA room will still be available. (Even if the TFSA total is capped as I expect, it would be political suicide to remove earned but unused TFSA room.)

[Michael D]

A related question perhaps, but I just flipped some non-registered investments 'in kind' into my TFSA. Information wasn't clear from my broker, but I transferred it at market value. Does this mean I created a taxable event (deemed disposition) or simply used market value to burn up my TFSA room? As TFSA contributions are 'after tax', I'm thinking that it is a disposition.

If you can contribute in-kind to your TFSA without 'deemed disposition', esaping CG taxes...then move as much as you can into the TFSA in order to sell/re-org as required for money for the car.

I may be corrected in my understanding. FWIW, I would have deemed losses in addition to gains and would wash the CGs anyways.

Edit: Found out that 'in kind' contributions are deemed dispositions.

[marty123]

I may be corrected in my understanding. FWIW, I would have deemed losses in addition to gains and would wash the CGs anyways.

Edit: Found out that 'in kind' contributions are deemed dispositions.

Just as for in-kind contributions to an RRSP, it's a deemed disposition that attracts capital gain. just as for an in-kind contribution to an RRSP, the capital loss should(*) be denied as it was "repurchased" by a related party (i.e. a TFSA trust for which you are the beneficiary).

(*): unless there is a special exception rule. Do your own DD

[Michael D]

the capital loss should(*) be denied as it was "repurchased" by a related party (i.e. a TFSA trust for which you are the beneficiary).

(*): unless there is a special exception rule. Do your own DD

Of course, I understand now (a superficial loss). I am an idjut.

[rhenderson]

Always worthwhile ?

I guess that depends on the individual situation. My yearly inflow is more than the outflow so it's nice to be able to stash away 5k/yr. especially when your marginal rate is over 40%

I may never need the money, but at least it's there if I do.

[Michael D]

I have a PS pension plus RRSP, so I want to know that I have a source of savings untaxed on withdrawal when it comes time to buy a condo, travel, etc. in retirement.

[Springbok]

All current unsheltered cash flow is used for expenses. So only money on which tax is due can be put in the TFSA.

Even if you need the income, why not move the investments with taxable income into a TFSA and draw the income as you need it?

Other options that we have used are:

- make early withdrawals from RRIF/RRSP and invest those in a TFSA where they will continue to grow tax free. If you leave the money in a registered account, you end up paying more tax when you do withdraw (assuming the investments grow)

- Use a line of credit to buy the TFSA. Interest on loan is tax deductable and the income is not taxable. Best of both worlds.

[Shakespeare]

Even if you need the income, why not move the investments with taxable income into a TFSA and draw the income as you need it?

In my situation, any extra cash flow is taxed. Why pay taxes now to put money in a tax-deferred plan?

(There are two scenarios under which it could be considered. One is a general market crash which gives me an opportunity to transfer beaten-up equities with little or no capital gains from my non-registered account to the TFSA, where, if they recover, the gains will become tax free. Of course, if they don't recover, the loss can't be written off. The other scenario is if I expect to be in a higher tax bracket shortly, but have room left in a lower bracket. Then I may be able to reduce future tax if I pay present tax.)

[marty123]

- Use a line of credit to buy the TFSA. Interest on loan is tax deductable and the income is not taxable. Best of both worlds.

Interest paid on money borrowed for a TFSA investment is not tax deductible.

[Springbok]

- Use a line of credit to buy the TFSA. Interest on loan is tax deductable and the income is not taxable. Best of both worlds.

Interest paid on money borrowed for a TFSA investment is not tax deductible.

You are right. But there surely there are ways to do it so that the funds borrowed are tax deductible. For example use $5000 from your taxable account to invest in tour TFSA and then borrow $5000 from your LOC and invest it in your taxable account.

[Michael D]

..or take an RRSP loan for $5,000 and put it in your RRSP. With the contributions you would have otherwise made to your RRSP, put them in your TFSA.

[Shakespeare]

..or take an RRSP loan for $5,000 and put it in your RRSP. With the contributions you would have otherwise made to your RRSP, put them in your TFSA.

Fine for somebody who's in contribution phase. I'm not.

[scomac]

I don't have a TFSA. I've though about it, but it never seemed to me like such a compelling idea. Maybe it's just because I'm a procrastinator...

I'm in a low tax bracket. I have a high interest ISA, the balance of which can vary over the year from $2K to $20K+ depending on the inflow of investment income and the outflow to our checking account. A TFSA isn't an appropriate alternative for that. I could buy a bond or a GIC and place it in a TFSA, but what have I gained there? I don't pay much tax in the first place and I've given up some yield on my bond/GIC by breaking it down into two smaller pieces. That sounds pretty much like a wash to me, at least at current interest rates. Canadian stocks? No. US stocks? No. There's better places for both based on tax treatment. About the only thing that seems to make the remotest sense to me is to look for something that will be a long term investment and have the potential to attract a lot of tax over time, both from appreciation as well as income generation. Now that sounds a lot like an emerging markets ETF/CEF. Yes...that would do. Oh wait a minute...they don't offer TFSA's in USD, do they? Pooh! Oh well...so much for that.

[northbeach]

Some Webring members crystallized tax losses last year by selling their ETFs and purchasing similar ones (ie. XIC for XIU).

Placing money into a TFSA may be appropriate. The accrued capital losses will offset any capital gains for holdings sold in margin accounts.

In my case I purchased PHN 280 (High Yield Bond Fund) for the TFSA. So I am now sheltering an anticipated 6% interest rate from taxes.

In future my TFSA's may be used to purchase a car or other larger capital expenditures.

[Shakespeare]

Placing money into a TFSA may be appropriate. The accrued capital losses will offset any capital gains for holdings sold in margin accounts.

I don't think you are allowed a capital loss for transferring something to a TFSA.

[northbeach]

Placing money into a TFSA may be appropriate. The accrued capital losses will offset any capital gains for holdings sold in margin accounts.

I don't think you are allowed a capital loss for transferring something to a TFSA.

You seem to be correct and I shall remember this in January. Thanks.

"But the superficial loss rules can be bypassed by selling this stock, putting the $5,000 in one’s TFSA and then, 30 days later, buying the same stock and making that purchase part of the TFSA portfolio. Obviously then, this two-step transfer would be done only if one had a loss and wished to claim a capital loss."
Quoted from http://www.langmichener.ca/index.cfm?fu ... 09&tID=244

So now I have another question. Can one purchase 5K of PHN 280 in a TFSA with cash from a margin account and then sell the similar amount of PHN 280 already held in the margin account. Does this also trigger the superficial loss rule?

[scomac]

So now I have another question. Can one purchase 5K of PHN 280 in a TFSA with cash from a margin account and then sell the similar amount of PHN 280 already held in the margin account. Does this also trigger the superficial loss rule?

I believe so as it has the same net effect as an asset transfer.

[marty123]

So now I have another question. Can one purchase 5K of PHN 280 in a TFSA with cash from a margin account and then sell the similar amount of PHN 280 already held in the margin account. Does this also trigger the superficial loss rule?

I believe so as it has the same net effect as an asset transfer.

Yes. You'd still be buying and selling within the 30 day period. For stocks, short selling, or using call options would also not qualify. The easiest thing to maintain exposure is to temporarily find a similar replacement. It's much easier for index funds (TD Canadian index vs CIBC Canadian Index vs XIU vs XIC vs etc.). Actively managed funds (PHN280) are a different thing: you need to trust that the other fund manager will make similar moves with a similar portfolio and similar durations. That's obviously leaving a lot to chance, especially because mutual funds attract penalties if held less than 90 days. At best, you can hope for partial protection. Going from PHN280 to cash or XCB for 31 days, then back to PHN280 is not perfect, but might be better than committing yourself to an unwanted bond fund for 90 days.

[Shakespeare]

If you are willing to take on the extra risk you can double up: buy the fund in the TFSA and sell in the non-reg 31 days later.

[newguy]

This topic was pretty simple. Let r = rate of return multiplier, Mn = marginal rate now, Mf = marg. rate future and x= amount transfered.
Move from non. reg. to tfsa
x*(1-Mn)*r
Leave in non.reg.
x*r*(1-Mf)
Make it an inequality and cancel
tfsa > ron.reg.
1-Mn > 1-Mf (assumes r >0)
Mn < Mf Duh!
So it's just a marginal rate comparison. But now that Phn fund, I assume, is fixed income of some sort. If you have fixed income in non. reg. you pay tax every year at the full rate. I think you could make the case to transfer this to a tfsa. Also if you felt the need to rebalance to more fixed income, I think it would make sense to take the cap. gains and transfer to tfsa.

newguy

[Shakespeare]

You also need to discount the future value of tax paid in the non-registered account.

[newguy]

You also need to discount the future value of tax paid in the non-registered account.

??? I was saying transfer x * (1-Mn) to the tfsa.
Are you talking about holding fixed income in the non. reg. account?

newguy