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)

La Jornada (Canada) - - ENGLISH SECTION -

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.

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