Comments on: TFSA – Part III: Strategies http://blog.canadian-dream-free-at-45.com/2010/01/15/tfsa-part-iii-strategies/ A Blog About Early Retirement and Happiness Thu, 09 Sep 2010 12:44:27 +0000 http://wordpress.org/?v=2.9.2 hourly 1 By: Petros http://blog.canadian-dream-free-at-45.com/2010/01/15/tfsa-part-iii-strategies/comment-page-1/#comment-39850 Petros Wed, 10 Feb 2010 18:55:37 +0000 http://blog.canadian-dream-free-at-45.com/?p=1297#comment-39850 Ray suggests that you cannot withdraw TFSA funds that were made by a higher earning spouse, then invest it outside the TFSA and avoid attribution rules. But it seems to me that you could at least remove the earnings. Suppose my higher earning spouse has made all my contributions ($10,000). Then, let's say I double the funds through my investments, and on Dec 31, I remove $10,000 of the $20,000 in the account. I then place this in my non-registered investment account. Attribution rules do not apply to secondary income (i.e., income from income). Thus, I have now $10,000 to invest which was not contributed by my spouse, and my higher earning spouse can now contribute $15,000 to my TFSA on Jan 1. Then, the new spousal contribution base in the TFSA is $25,000 and as long as leave these funds in the TFSA, I should be able to remove any earnings and invest them without attribution rules applying. Ray suggests that you cannot withdraw TFSA funds that were made by a higher earning spouse, then invest it outside the TFSA and avoid attribution rules. But it seems to me that you could at least remove the earnings. Suppose my higher earning spouse has made all my contributions ($10,000). Then, let’s say I double the funds through my investments, and on Dec 31, I remove $10,000 of the $20,000 in the account. I then place this in my non-registered investment account. Attribution rules do not apply to secondary income (i.e., income from income). Thus, I have now $10,000 to invest which was not contributed by my spouse, and my higher earning spouse can now contribute $15,000 to my TFSA on Jan 1. Then, the new spousal contribution base in the TFSA is $25,000 and as long as leave these funds in the TFSA, I should be able to remove any earnings and invest them without attribution rules applying.

]]> By: Erick http://blog.canadian-dream-free-at-45.com/2010/01/15/tfsa-part-iii-strategies/comment-page-1/#comment-38836 Erick Tue, 19 Jan 2010 22:10:18 +0000 http://blog.canadian-dream-free-at-45.com/?p=1297#comment-38836 After a bit of googling, I didn't find anything official on whether or not the attribution rules kick if a TFSA withdrawal is re-invested in an open account by the wife (as described in the above example). The closest I found was this interpretation on the Building Wealth site here: http://www.buildingwealth.ca/Q_and_A/Archives.cfm?ShowAll=Yes&AYear=2009 === It seems the government anticipated this loophole by adding a line that says the attribution rules "will not apply to income earned in a TFSA that is derived from such contributions". Note the phrase: "in a TFSA" which suggests that if the money is withdrawn by the spouse and then reinvested the attribution rules will kick in. At some point in time, we may see a court challenge on this one. === After a bit of googling, I didn’t find anything official on whether or not the attribution rules kick if a TFSA withdrawal is re-invested in an open account by the wife (as described in the above example).

The closest I found was this interpretation on the Building Wealth site here:
http://www.buildingwealth.ca/Q_and_A/Archives.cfm?ShowAll=Yes&AYear=2009

===
It seems the government anticipated this loophole by adding a line that says the attribution rules “will not apply to income earned in a TFSA that is derived from such contributions”.

Note the phrase: “in a TFSA” which suggests that if the money is withdrawn by the spouse and then reinvested the attribution rules will kick in. At some point in time, we may see a court challenge on this one.
===

]]> By: Ray http://blog.canadian-dream-free-at-45.com/2010/01/15/tfsa-part-iii-strategies/comment-page-1/#comment-38791 Ray Mon, 18 Jan 2010 22:39:23 +0000 http://blog.canadian-dream-free-at-45.com/?p=1297#comment-38791 Like I said, as long as all her withdrawls aren't used for further investments then it might just work (according to the financial advisor at TD Canada Trust). Like I said, as long as all her withdrawls aren’t used for further investments then it might just work (according to the financial advisor at TD Canada Trust).

]]> By: Robert http://blog.canadian-dream-free-at-45.com/2010/01/15/tfsa-part-iii-strategies/comment-page-1/#comment-38773 Robert Mon, 18 Jan 2010 15:59:14 +0000 http://blog.canadian-dream-free-at-45.com/?p=1297#comment-38773 Ray: You said, "...the other spouse withdraws the money as long as the 2nd spouse doesn’t reinvest it (then attribution rules would kick in)." That's a very conservative interpretation. In all the information from the CRA that I read, attribution stops as soon as the spouse deposits it to the TFSA. I even phoned the CRA and they stressed the same thing. Which suggests a strategy. Suppose you earn 15% return each year. Last year, you gave your wife $5,000 to contribute to a TFSA and now it's worth $5750. You give her another $5000 in January and by December she has $12,362 in her TFSA. She can take it all out tax free. The next month, January, you give her $17,362 to put in her TFSA. You've now given her $27,362 without attribution. She now has $12,362 in an open account and $17,362 in the TFSA, which is worth $20,000 by the end of the year. She can take out that $20,000 in December, then in January you can give her another $25,000. This could go on until you get your accounts even, so that you both have similar levels of taxable investment income (open accounts). This strategy is most applicable to people who have maxed out their RRSPs (maybe through generous pension plans) and have imbalanced open accounts. Ray: You said, “…the other spouse withdraws the money as long as the 2nd spouse doesn’t reinvest it (then attribution rules would kick in).”

That’s a very conservative interpretation. In all the information from the CRA that I read, attribution stops as soon as the spouse deposits it to the TFSA. I even phoned the CRA and they stressed the same thing. Which suggests a strategy.

Suppose you earn 15% return each year. Last year, you gave your wife $5,000 to contribute to a TFSA and now it’s worth $5750. You give her another $5000 in January and by December she has $12,362 in her TFSA. She can take it all out tax free. The next month, January, you give her $17,362 to put in her TFSA. You’ve now given her $27,362 without attribution. She now has $12,362 in an open account and $17,362 in the TFSA, which is worth $20,000 by the end of the year. She can take out that $20,000 in December, then in January you can give her another $25,000.

This could go on until you get your accounts even, so that you both have similar levels of taxable investment income (open accounts). This strategy is most applicable to people who have maxed out their RRSPs (maybe through generous pension plans) and have imbalanced open accounts.

]]> By: The Financial Blogger » Blog Archive » Financial Ramblings http://blog.canadian-dream-free-at-45.com/2010/01/15/tfsa-part-iii-strategies/comment-page-1/#comment-38734 The Financial Blogger » Blog Archive » Financial Ramblings Sun, 17 Jan 2010 13:14:39 +0000 http://blog.canadian-dream-free-at-45.com/?p=1297#comment-38734 [...] Canadian Dreams talks about TFSA strategies. [...] [...] Canadian Dreams talks about TFSA strategies. [...]

]]> By: Robert http://blog.canadian-dream-free-at-45.com/2010/01/15/tfsa-part-iii-strategies/comment-page-1/#comment-38684 Robert Fri, 15 Jan 2010 20:20:52 +0000 http://blog.canadian-dream-free-at-45.com/?p=1297#comment-38684 Ray: You're right that either spouse can contribute to the TFSA, and you've given a good example. It's one of the few ways to legally get money earned by one spouse into the account of the other spouse. To address the sentence you quoted, there is no tax on TFSA withdrawals. It was the flexibility on other taxable withdrawals, such as RRIF or LIF payments, that I was referring to. Suppose when you retire, you have a pension, a RRIF and a TFSA. Your spouse has a RRIF and a TFSA. You draw your income ($5000/mo) from the pension ($2000/mo, required) and the RRIF ($1000/mo) and your wife from her RRIF ($2000/mo), to make use of the lower tax brackets. Then, one year, you decide to return to work for half the year. Between your pension income and employment income, you have more money than you need to spend for six months, so you stash the employment income in the TFSA. For the last half of the year, you need more than just pension income to live on. Don't take the money from the RRIF. Increase your wife's RRIF up to the top of the tax bracket ($40,000/yr Federal 15%), then take money out of your TFSA. This will avoid the higher rate of taxes in this temporary situation. It's a bit complex and not a very likely scenario. But I value the flexibility TFSAs offer ("Do I want taxable or tax-free income this month?"). And it makes an argument to keep some investments outside of RRSPs, in the TFSA. Ray: You’re right that either spouse can contribute to the TFSA, and you’ve given a good example. It’s one of the few ways to legally get money earned by one spouse into the account of the other spouse.

To address the sentence you quoted, there is no tax on TFSA withdrawals. It was the flexibility on other taxable withdrawals, such as RRIF or LIF payments, that I was referring to.

Suppose when you retire, you have a pension, a RRIF and a TFSA. Your spouse has a RRIF and a TFSA. You draw your income ($5000/mo) from the pension ($2000/mo, required) and the RRIF ($1000/mo) and your wife from her RRIF ($2000/mo), to make use of the lower tax brackets. Then, one year, you decide to return to work for half the year. Between your pension income and employment income, you have more money than you need to spend for six months, so you stash the employment income in the TFSA. For the last half of the year, you need more than just pension income to live on. Don’t take the money from the RRIF. Increase your wife’s RRIF up to the top of the tax bracket ($40,000/yr Federal 15%), then take money out of your TFSA. This will avoid the higher rate of taxes in this temporary situation.

It’s a bit complex and not a very likely scenario. But I value the flexibility TFSAs offer (“Do I want taxable or tax-free income this month?”). And it makes an argument to keep some investments outside of RRSPs, in the TFSA.

]]> By: Ray http://blog.canadian-dream-free-at-45.com/2010/01/15/tfsa-part-iii-strategies/comment-page-1/#comment-38682 Ray Fri, 15 Jan 2010 19:53:31 +0000 http://blog.canadian-dream-free-at-45.com/?p=1297#comment-38682 "It is possible that, in retirement, there will be enough money in each TFSA that the couple can choose who will make their other withdrawals in order to minimize the total tax bill." What does that mean exactly? I thought there is no tax on withdrawls. Also, I heard that if a single spouse contributes to both TFSAs that's fine, even if the other spouse withdraws the money as long as the 2nd spouse doesn't reinvest it (then attribution rules would kick in). I'd appreciate learning more about this, because I contribute $10k/year to both our TFSAs. I even have POA setup on her TFSA so that the 2nd TFSA account shows up right in TDW for the ultimate convenience of transferring funds in/out online. “It is possible that, in retirement, there will be enough money in each TFSA that the couple can choose who will make their other withdrawals in order to minimize the total tax bill.”

What does that mean exactly? I thought there is no tax on withdrawls. Also, I heard that if a single spouse contributes to both TFSAs that’s fine, even if the other spouse withdraws the money as long as the 2nd spouse doesn’t reinvest it (then attribution rules would kick in).

I’d appreciate learning more about this, because I contribute $10k/year to both our TFSAs. I even have POA setup on her TFSA so that the 2nd TFSA account shows up right in TDW for the ultimate convenience of transferring funds in/out online.

]]> By: Robert http://blog.canadian-dream-free-at-45.com/2010/01/15/tfsa-part-iii-strategies/comment-page-1/#comment-38676 Robert Fri, 15 Jan 2010 17:55:45 +0000 http://blog.canadian-dream-free-at-45.com/?p=1297#comment-38676 One thing I noticed in my research on TFSAs has to do with residency. If you become a non-resident of Canada, you can maintain your TFSA, but you accumulate no contribution room (much like an RRSP). Growth, income and withdrawals are still tax-free and a withdrawal still results in increased TFSA room the following year. That is the only case in which you can make a TFSA contribution while non-resident. One thing I noticed in my research on TFSAs has to do with residency. If you become a non-resident of Canada, you can maintain your TFSA, but you accumulate no contribution room (much like an RRSP). Growth, income and withdrawals are still tax-free and a withdrawal still results in increased TFSA room the following year. That is the only case in which you can make a TFSA contribution while non-resident.

]]> By: Robert http://blog.canadian-dream-free-at-45.com/2010/01/15/tfsa-part-iii-strategies/comment-page-1/#comment-38675 Robert Fri, 15 Jan 2010 17:52:38 +0000 http://blog.canadian-dream-free-at-45.com/?p=1297#comment-38675 Financial Student: That's a great question. A TFSA has two options, a "successor holder" or a "beneficiary". Successor Holder means you named only your spouse as the beneficiary, in which case the TFSA simply passes to the spouse intact. The spouse may then own two TFSAs. When a TFSA holder dies and the spouse is not the successor holder, the entire amount is deemed disposed at fair market value and the TFSA is ended. Any future income or growth is taxable to the estate or beneficiaries. Financial Student: That’s a great question. A TFSA has two options, a “successor holder” or a “beneficiary”.

Successor Holder means you named only your spouse as the beneficiary, in which case the TFSA simply passes to the spouse intact. The spouse may then own two TFSAs.

When a TFSA holder dies and the spouse is not the successor holder, the entire amount is deemed disposed at fair market value and the TFSA is ended. Any future income or growth is taxable to the estate or beneficiaries.

]]> By: CPS http://blog.canadian-dream-free-at-45.com/2010/01/15/tfsa-part-iii-strategies/comment-page-1/#comment-38674 CPS Fri, 15 Jan 2010 17:52:32 +0000 http://blog.canadian-dream-free-at-45.com/?p=1297#comment-38674 It will be interesting to see the evolution of the TFSA once the contribution rooms expand. As you mentioned it would be an ideal place to perform high frequency trading. The problem however is that with a $5000 maximum, the commissions prove to eat up too much of the transaction. Once the contribution room grows to say $50,000 it will be interesting. 2010 is all about debt reduction so the TFSA will go unfunded this year, unless very good thing happen. It will be interesting to see the evolution of the TFSA once the contribution rooms expand. As you mentioned it would be an ideal place to perform high frequency trading. The problem however is that with a $5000 maximum, the commissions prove to eat up too much of the transaction. Once the contribution room grows to say $50,000 it will be interesting.

2010 is all about debt reduction so the TFSA will go unfunded this year, unless very good thing happen.

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