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Upcoming Tax Free Savings Accounts (TFSA)


With the big hype around the upcoming Tax Free Savings Accounts, I decided to do some research to see which banks and discount brokerages will be offering the product.  I imagine that as we get closer to the launch date (Jan 2009), we will see more of them popping up.

As of today though, here are the companies that will be offering a TFSA:

ING Direct (high interest savings account) (Get the ING $25 referral bonus)

While we can’t help you avoid taxes in 2008, we can pay you more than enough bonus interest to cover those taxes! Effective January 1, 2009, funds deposited in the promotional Tax-Free Investment Savings Account opened between October 4 and December 31 will be transferred to a new Tax-Free Savings Account so you won’t miss a minute of Tax-Free interest.

Open an ING DIRECT promotional tax-free Investment Savings Account today and on December 31st we will double your interest payment. This should be enough to cover any tax you’ll need to pay on interest earned and will help you get a head start for tax-free saving in January.

Royal Bank (savings and investment accounts)

  • Choose from a variety of investment options: RBC Funds, RBC GICs and RBC Savings Deposits.
  • You don’t lose the contribution room if you make a withdrawal, but you do need to wait until the next year to re-contribute the money.
  • Through a TFSA at RBC Direct Investing you will be able to create a diversified portfolio with access to a broad selection of investments including: stocks, bonds, guaranteed investment certificates (GICs), and over 2500 mutual funds.

Scotia Bank (savings and investment accounts)

  • Choose from a range of investments like mutual funds, savings accounts, and GICs.
  • All the income (interest, dividends and capital gains) earned in your Scotia® TFSA are tax-free for life.

Bank of Montreal (unconfirmed – I assume savings and investment accounts)

  • BMO Financial Group will offer the Tax-Free Savings Account in 2009. Check back regularly as additional information will be added as it becomes available.

CIBC(unconfirmed – I assume savings and investment accounts)

  • Most RSP eligible investments such as cash deposits, GICs, mutual funds, stocks and bonds
  • All income earned in your TFSA, whether interest or other investment income, is tax-free

Toronto Dominion Bank (unconfirmed – I assume savings and investment accounts)

Starting January 2, 2009, there’s a great new way for you to save money. TD Canada Trust will be offering the new Tax–Free Savings Account, which was recently announced by the Canadian government in the 2008 budget. A Tax–Free Savings Account (TFSA) is a flexible investment account that allows you to earn investment income without paying taxes and gives you access to your money whenever you want it.

PC Financial (high interest savings account)

That’s right. Every dollar of interest earned will be tax-free – for faster savings – when you contribute your funds to the tax-free savings account that will soon be available from President’s Choice Financial services.

E-Trade (Investment account) ($9.99 – $19.99/trade)

Starting January 2009, E*TRADE Canada will be offering the new Tax-Free Savings Account, which was recently announced by the Government of Canada in the 2008 Federal Budget.

An E*TRADE Canada Tax-Free Savings Account (TFSA) is a flexible investment account that allows you to invest in eligible investments without paying taxes on the investment income you earn within the TFSA.

  • Contribute up to $5,000 each year starting January 2009
  • Investment income (interest, dividends, and capital gains) earned in your E*TRADE Canada TFSA is tax-free
  • You can withdraw money from your TFSA for any reason, and all withdrawals are tax-free

Questrade (Investment account) ($4.95 – $9.95/trade)

  • The 2008 federal budget introduced a flexible new investment vehicle for Canadians, the tax-free savings account (TFSA). Starting in 2009, Questrade clients will be able to contribute up to $5,000 annually into a TFSA, where savings can earn dividends and capital gains tax-free. For savvy investors, this can improve gains significantly.

I’m thinking that most of the big banks will offer a high interest savings account for the TFSA, but they won’t be as competitive as online savings account companies like ING Direct and PC Financial.

The value with the banks is with their discount brokerage branch where you can invest the money to grow the account over the long term.  Since the accounts will be small initially, I’m assume that the trading commissions will be fairly high ($30/trade).  The Questrade TSFA looks like it may be the best solution as an investment account in the first few years to keep trading costs as low as possible.

Are you guys as excited about the TFSA as I am?

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FrugalTrader About the author: FrugalTrader is the founder and editor of Million Dollar Journey (est. 2006). Through various financial strategies outlined on this site, he grew his net worth from $200,000 in 2006 to $1,000,000 by 2014. You can read more about him here.

{ 76 comments… add one }

  • Konstantin January 11, 2009, 3:15 pm

    Sampson,

    Only eligible dividends from (usually big) corporations are subject to the enhanced dividends tax credit.

    The income trusts’ distributions are not.
    They are taxed mostly like interest income (highest marginal rate).

    In this sense, you are right – they should be placed inside TFSA.

    You are not missing out on any favourable tax treatment.

    KK

  • Mark January 12, 2009, 10:37 pm

    @Sampson and Konstantin:

    My RRSPs are not maxed-out yet. Not quite as lucky as you Sampson!!

    I’ve been contributing to RRSPs for ~10 years, but I still have about $20,000 worth of contribution room. Hopefully over the next few years, I can get that contribution room down. The only reason I continue to contribute to RRSPs (index funds), is because I need to off-set my income. Hopefully I can keep my job (in this economy) and continue that trend to build a nest egg of >$250,000 K for retirement. It’s a great bet that my retirement income won’t be as high as it is now, so the RRSP plan works for me, I will be at a lower marginal tax rate.

    That said, I need to start finding the money this year to begin my CDN dividend paying journey. Start getting into DRIPs. That will be another income stream in retirement. No DRIPs in TFSA, simply reinvest everything for many years to come.

    I see this new TFSA as a vehicle to buy some funds or bonds and let those grow into another egg (third stream; tax-free :)

    This new TFSA has lots of potential long term!

  • Sampson January 13, 2009, 12:56 am

    Mark, we are all dealt different cards in life, and I do feel very fortunate for what my wife and I have. It certainly sounds like you are well on your way down the right track. Just be patient and vigilant with your plan.

    Your plan for the TFSA sounds like a great start. For the time being, put what you can in there, set it and forget it. It can also double as your emergency fund for the time being and should make a wonderful co-retirement savings vehicle when combined with your RRSPs.

  • Joe January 13, 2009, 3:15 pm

    Any one considering borrowing money from your HELOC and invest it using TFSA trading accounts?
    Although the loan interest for investing thru registered accounts is not deductible, but it has no tax implications for dividend and capital gains. Whereas if investing in a investment account, a large portfolio will build up and the how to melt down it after the mortgage is full paid is big headache.
    The 10k room for a couple is not small for medium income family after maximizing out your RRSP and RESP contribution.
    I think the fully implemented Smith Manoeuvre is just good for people with income over 10k at least.

  • cannon_fodder January 13, 2009, 6:39 pm

    Joe,

    If you have a registered plan (e.g. RRSP), you could use that to “meltdown” the HELOC while not touching your investment account.

    If you borrow from your HELOC to invest in a TFSA, then why not invest it in an RRSP instead where you likely have a greater amount that can be invested? Or was this asked from a hypothetical question where the RRSP’s have been maxed?

    If you borrow from your HELOC to invest in a non-registered account, you would not only be able to deduct the interest if it was the appropriate investment, but you could also claim a capital loss should that arise. If the investment was a high interest bearing investment, then it would make sense to use the TFSA rather than a non-registered plan.

  • Grant January 21, 2009, 6:51 pm

    I read that if you withdraw from your TFSA account, you will have to wait until the following year to be able to re-contribute, is that true? So if I, let’s say, open a TFSA savings account with ING with the max value of 5K, will I be able to withdraw and move it to ICICI in the middle of 2009? But if I withdraw my TFSA fund from ING, would I have to wait until next year before I can deposite it into my new ICICI TFSA account? I’m clueless…

    Thanks for any explanation for this ignorant person…

  • DAvid January 21, 2009, 9:34 pm

    Grant asks: “I read that if you withdraw from your TFSA account, you will have to wait until the following year to be able to re-contribute, is that true?

    Yes

    “So if I, let’s say, open a TFSA savings account with ING with the max value of 5K, will I be able to withdraw and move it to ICICI in the middle of 2009?”

    You can TRANSFER it to ICICI, likely for a fee. If you withdraw it and open a second TFSA, you would pay a 1%? penalty on a $5000 over contribution. It would be seen as having two TFSA open with $5000 in each. Interestingly, the transfer fee is often equal to (you guessed it) 1% of the max contribution.

    “But if I withdraw my TFSA fund from ING, would I have to wait until next year before I can deposite it into my new ICICI TFSA account?”

    Yes. You could withdraw on December 31, and deposit on January 1, to minimize the uninvested time.

    DAvid

  • Dale March 9, 2009, 9:30 pm

    Can capital losses on equities held in a TFSA appliable against capital gains held out side the TFSA?

    Thanks a lot,
    Dale

    • FrugalTrader FrugalTrader March 9, 2009, 9:36 pm

      Dale,

      To my knowledge, you cannot claim capital losses which come from a TFSA.

  • Alex. May 24, 2009, 10:16 pm

    Hi all.

    As I knew and read here the gain made in a TFSA is tax free. But now my question: Will you have to report the potential income to the CRA even if you don’t have to tax them?

    Or do we just keep the TFSA unmentioned?

  • Martin May 25, 2009, 10:17 am

    Alex,

    I am not sure but I think that TFSA works the same as RRSP. You just have to tell them how much you put in the TFSA and how much you have taken out. The rest, you don’t have to tell them about that.

    But I am not sure.

  • Binh Levu July 5, 2009, 6:46 pm

    Yes TFSA is good,but is there a string to catch TFSA holder?Like when you withdraw your money from this acct. bank will take your service fee,and other you couldn’t tell call”Hidden fee”??? That is the thing I’m worry about TFSA.
    “Nothing for free” Right?

  • Traciatim July 8, 2009, 10:37 am

    Binh Levu, the TFSA rules themselves don’t dictate fees, it’s the individual plan provider that determines this. Be sure to real all the fine print before you sign. Pick plans with no withdrawal fees, if everyone does this then that’s what products will be offered by other providers.

  • AK July 28, 2009, 5:19 pm

    Having read the above comments, don’t you think Claymore’s Global Monthly Advantaged Dividend ETF make a lot of sense in a TFSA?

  • Smac20 August 3, 2009, 2:25 pm

    Now that the TFSA is here it is time to determine what the best investments are. I believe the TFSA should be used for somthing that pays a high dividend, is tax inefficient, and has relatively low volatility. This means income trusts.

  • Smac20 August 5, 2009, 12:36 am

    One more question, is it better to leave your TFSA to a beneficiary or to your estate? What are the implications?

  • Big J January 3, 2010, 3:45 pm

    I have stock options with the company I work for that are currently ‘in the money’. Can I buy a few in my TFSA, once there, sell them and then repeat to avoid capital gains tax? Basically “flipping” the shares in a tax free way.

  • cannon_fodder January 4, 2010, 10:53 am

    Big J,

    If you can transfer the options into your TFSA (i.e. they qualify as acceptable investments that can be held in a TFSA) then you should be able to do what you say.

    I just don’t know how you can transfer them into a TFSA. Only once was I ever offered stock options in a company I worked for. They never moved into the money but if I remember correctly, they were held by a US brokerage. I was thinking that I would simply exercise them at the brokerage rather than transfer them.

    Let us know what you find out.

  • ruchir February 1, 2011, 4:24 pm

    I don’t understand why no one is talking about investing in deep value stocks in your TFSA accounts and hold those investments for perpetuity. I definitely see this as a way to get a lot wealthier. I am always amazed when people talk about GICs and TFSA together. It just makes no sense. If you are making 2% on your GIC, the tax savings would be merely $100 X marginal rate 45% (let’s assume) = $45. Why on earth would you want to invest in GICs for $45? Is it worth the pain? On the other hand investing in deep value stocks for long-term would mostly likely be extremely beneficial (100% tax-free) under TFSA.

  • Mark February 21, 2011, 4:34 pm

    Forgive me if this has already been asked:

    If you are doing the smith manouvre, would it not make the most sense to use your HELOC to maximise your TFSA? For example, questrades tax free “trading” account. This way the portfolio you end up with at the end of your smith manouvre mortgage (which is hopefully larger than your HELOC) can be withdrawn tax free to repay the HELOC and have a nice tax free chunk of change to keep investing with.

  • Traciatim February 21, 2011, 7:22 pm

    Mark, interest on funds borrowed to invest in a TFSA is not tax deductible; the TFSA ruins the manouvre.

  • Konstantin February 22, 2011, 12:49 pm

    Ruin is an overstatement.

    More like you cannot double-dip – having tax-free income/cap gains AND having tax-deductible interest.

    You need to choose one ;)

  • Mark February 23, 2011, 2:47 pm

    Ok, gotcha, that does make sense, too bad though. So how does it work when you are doing your taxes, in order to deduct the interest, do you only have to show that you have deposited the amount from the loan in a trading account? For arguments sake, say my starting HELOC is 50,000, but throughout the year I have 40,000 in cash and only ever use 10,000 to buy stock. Is the interest on the full 50,000 deductible or only 10,000?

    TIA

  • Mark February 23, 2011, 2:48 pm

    I appologize, that question is probably better suited for the smith manouver page.

  • Mark February 23, 2011, 4:25 pm

    Here’s a question more appropriate for this area:

    I’m sure that other people have thought of this and it is illegal in some way, under the GAAR probably? Anyway… TFSA’s have an over contribution charge of 1% per month I believe.
    Scenario: It’s December 1st, option expiry is December 16th, there is a stock at $20, with call options going for 1.00 at the 20 dollar strike. You deposit 50,000 in your TFSA, buy 2500 shares, sell covered calls to get 2500 dollars. The next trading day after expiry, you withdraw the 50,000 (assuming the stock hasnt moved lower, humor me) plus the 2500 in premiums.

    The result is:
    a. You walk away with 2500 dollars?
    b. You walk away with 2500 dollars less 500 dollars for the 1% overcontribution charge?
    c. You walk to court because the CRA is after you?

  • Mark February 23, 2011, 4:42 pm

    Nevermind, apparently these types of “abuses” were rectified in new amendments last year. I bet there are some people out there who made a killing doing this before the new rules.

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