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Wednesday, April 16, 2014

Under the Hood of My TFSA

Posted by Tim Stobbs on October 7, 2013

During my last net worth update I commented on the fact my Tax Free Savings Account (TFSA) contributions are now maxed out which would mean I’ve contributed $25,500 in the last five years.  That account balance at that time was $33,100 or a total gain of $7600 or 30%.  The gains are big, but you have to keep in mind that my TFSA is my highest risk account.  Unlike a lot of people who just put their contributions in savings account (paying 1% return which is so tragic waste of this accounts potential I almost weep when I hear it), mine is all invested in individual stocks.

So why is a savings account is a tragic waste of potential?  Well let’s say you have maxed your TFSA ($25,500) in a high interest saving account at Royal Bank for a 1.1% yield.  That would be a big old $280.50 in interest per year.  Taxed at a marginal rate of 39%, you saved $109 in taxes. Not bad right?

In my TFSA, I buy stocks that mirror my bills since I’m interested in mature businesses that pay a good dividend or distribution.  My current holdings are: AQN, BCE, D.UN, NPI, and REI.UN.  In total these stocks pay me $1982 a year to hold them or if you compare that back to my contributions that is a 7.8% yield. That is a high yield, but like I said this is my high risk account, I would be insulted if I wasn’t being paid well for taking the risk.  Now just on the distributions (39% marginal tax rate) and dividends (17.9% marginal tax rate) I save about $505 per year on taxes.  Yet it gets better, I also save any capital gains taxes on anything I sell as well.

So it is safe to say I’m saving likely five times the taxes that people who have their TFSA in plain old savings accounts.  So what’s the deal?  Why do people use their valuable TFSA contribution room on just savings?  Well, the TFSA title tends to confuse some people, but the other thing is people focus too much on their marginal tax rates.  I’ve been asked several times why I’m putting dividend paying stocks in my TFSA since they think saving at your 39% marginal rate is better than a mere 17.9% for dividends.  The issue is how much yield are you saving the tax on, even if you ignore the income trusts in my TFSA I’m still saving $226 per year on tax on just the dividends.  I’ve got much more yield that even at a lower tax savings I’m still coming out ahead.

So the lesson for today is: don’t let the your marginal tax rate drive your investing behaviour, check the math when making investing decisions.  So what do you have your TFSA account invested in?


The Tax I LOVE to Pay

Posted by Tim Stobbs on April 4, 2013

I think I have a similar point of most people when it comes to taxes.  I don’t mind paying them if they provide good service, but I don’t want to pay more than required.  Yet when it comes to my yearly tax bills there is one they could potentially double and I would still pay with a smile on my face.


Yes, you did read that correctly.  I like paying one of my taxes, actually forget that, I LOVE paying this one tax.  Which one? A small part of my property tax bill is devoted to our local library system which I gladly pay and hell I would still be getting a bargain even if they doubled it.

Why? Because for the mere $200 or so I pay in tax each year I’m saving a TONNE of cash.  How much?  Well I haven’t actually tracked a full year of what we borrow from the library, but this is what we have borrowed in March alone:

  • 12 books for my wife
  • 12 kid movies (including a full season of Star Wars Clone Wars as one item)
  • 15 kids books
  • 5  DVDs for me
  • 3 book for me
  • Two ebooks for me
  • and a partridge in a pear tree

What what exactly would all this retail for?  Well it sort of hard to say since I don’t actually pay for these and haven’t in such a long time I often don’t have a clue how much someone would pay to rent a DVD.  I’ll go with a rough estimate of $4/DVD rental (based on the prices on iTunes and Google’s Play stores).

The books are  a bit more complex.  My wife tends to borrow more paperbacks than I do, but new hardcovers are really pricey, so I’ll just average them and say about $14/book.  The kids books include the little level reader ones and hardcovers so again the prices vary, but let’s average $12/book.

So in total the movies were worth 17 x $4 = $68, the kids books were worth 15 x $12= $180, and the adult books 17 x $14= $238.  Or in grand total $486 for March alone.

Now March was a bit high for books for my wife, but otherwise a fairly normal month for us.  We like to read and watch movies a lot so we tend to borrow a lot of material. Yet to be fair I’ll scale that down by 20% to be more representative of a long term average, so that would take it down to $389.  So over a year our library usage is worth $4668 for the mere tax of $200/year or over 23 times the value I pay for it. And people wonder how I’m able to live on so little.  ;)

Yes the library is the best tax payment I make ever year.  Now a fair number of people don’t realize how great the library really is and thus don’t use it.  So to those people I will say: thank you for paying for my family to use all that material. Just because they are too impatient to wait for a hold to come in, I get easier access to my materials and still save a boatload of cash.

So what’s your best tax bill you pay each year?  Or what do you love/hate about your local library?

Tax Software Contest

Posted by Tim Stobbs on February 13, 2013

Well with tax season nearly here, the good people over at at TurboTax are looking to help you with your taxes, so they contacted me about doing a give a way.  There are two prizes: online codes to use TurboTax Online for free!  (Granted if your taxes are simple enough you may be able to use TurboTax Online for free anyway, so go have a look).

Ok, I will totally admit I’m bias here as I’ve been using their product for years now.  Granted I could do my own taxes on paper, but I still buy their software….why? Because they make getting through the maze of deductions easy and when you have two small businesses and investments: I want easy.

So to enter I’m going to make this contest very simple: just leave a comment with your real email address on this post (as that is how the winners will get their prize).  Contest open to residents of Canada.  Deadline to enter is 8pm CST on Feb 20, 2013.  Winner will be selected by random number generator.

Good luck to everyone.