Tax free savings accounts: controlling your financial destiny
The first of a two-part series: too few Canadians know they can use TFSA funds to invest in ventures that could bring big gains (and cost nothing in tax)
Are you are one of the six million Canadians who have opened a tax free savings account ( TFSA)?
Have you ever wondered about the real purpose of these accounts? You’re not alone. Millions of Canadians are unaware of the potential windfall that former finance minister Jim Flaherty handed them in 2009 when he introduced TFSAs.
TSFAs were introduced too encourage Canadians to invest in Canada. It was thought at the time to be e a saviour for Canada’s investment-starved technology sector.
TSFAs are government-regulatedregulated savings that carry special rights. The e limit starting in
2009 was $5,000. The governmentment then changed the annual TSFA contribution n limit to $5,500 for two years, then to $10,000 for one year and now back to $5,500 for the next twoo years. It’s starting to add up. An adult can have amassed $52,000 if they contributed the maximum um allowed each year - and that’s a considerable e sum.
What’s so good about this his opportunity?
You can invest your TSFAA in almost anything and you don’t t pay a penny in taxes on capital gains. ains. If you invested this capital andd made a $100,000 gain, you would pay ay no tax on that gain. If you drew downn that capital gain and paid yourself an income,ncome, you would pay no income tax on thathat revenue.
So why don’t Canadians use TSFAs to invest in high-risk, high-return ventures?
That’s a very good question,tion, since there’s no doubt the Canadian economymy needs this money to be more productive. In thee nine years since the introduction of the TSFA program,gram, more than $90 billion has accumulated in these hese plans. Regrettably, almost all of this capital is languishing nguishing in Guaranteed
Investment Certificate (GIC) type accounts earning one to two per cent annual returns.
The pitiful reality is Canadians nadians aren’t taking advantage of this potential windfall. Canadians have been convinced that TSFAs can’t be selfdirected; that the only investment options are bank-sponsored funds that, frankly, aren’t doing investors any good or helping the technology sector, which would help our economy.
The TFSA program is massively misunderstood. Let me give you an example:
About a year ago, I was travelling with an old friend. We had a good chance to talk without distractions. He mentioned he and his wife both had TFSAs and that he had just moved all of his TFSA money from one bank to another for a better interest rate.
Later, he told that me a mutual friend had recently bought controlling interest in a silver mine and the prospects were promising. He said he’d accounts bought $10,000 worth of shares in the company. I asked what the shares might rise to if the assay work proved successful. He told me he’d paid 20 cents a share and they could rise to $2, a tidy profit.
I asked if he’d purchased the shares in his TFSA account. His reply astonished me.
“You can’t do that!” he said.
“Oh yes you can,” I replied. “And not only can you, you should do that.”
There was about five minutes of dea deadly silence. I could tell his thoughts ran something like this: “What th the heck, my financial adviser didn’t tell me this.”
I explained the tax implication of a profitpro scenario in which $10,000 invested at 20 cents per share yields $100,0 $100,000 if those shares sell for $2 each, showing a profit of $90 $90,000.
The normal tax on that profit would be as much as $45,000.
If you coul could qualify this as a capital gain, then only halfha of the profit (or $45,000) would be ta taxed. That still means paying $20,000 to $22,500 in tax.
But if he had bought the shares through his TFSA, the tax payable would b be zero.
Wh When you get your next TFSA stateme statement, take a good look at it and conside consider the following:
You Your financial adviser’s interests may not align with yours. They may wish to p place your TFSA money in financial pr products that benefit them the most.
Start th thinking of this TFSA money as your equity f fund and use it for higher-risk investments investments. Remember, if the risk works, the reward i is tax free.
Consid Consider investing in our country’s future. If CanadiansCan don’t believe in their own technological future,futu nobody else will. We have some of the sharpest brains inventing groundbreakinggr technology. It will wither on the vine if we don’t invest in it. By helping out, we can create successful businesses with jobs and growth p potential.
Canadians need to do their homework about the potential of their TFSAs. It’s their money.
Next week: How to invest your TFSA funds to get the most benefit and help tech ventures. -TROYMEDIA
Joe Batty, chief financial officer for Troy Media Digital Solutions Ltd., is an accountant with a specialty in new asset management. Joe has more than 40 years of experience in finance and accounting.