EVERYTHING You Need To Know About the TFSA | Retirement In Canada

in this video today we're going to focus on what is a tfsa exactly who can own a tfsa how much money you can put in or contribute to a tax-free savings account what investments can you buy there's a lot of misconceptions out there what happens if a tfsa holder passes away mistakes and misconceptions misunderstandings and finally we're going to finish off with some strategies that you can use to make sure that you're getting uh the biggest bang for your buck in your tax rate looks like we're in the click we are more than a decade now since the tax free savings account or the tfsa was unveiled here in canada and even though all that time has gone by there's still a lot of misunderstanding about what a tax-free savings account is how you can put it to use and uh you know what are the most effective ways of using that for your to your advantages in this video today we're going to explore all of the aspects that will help you use this tool to the best of your own advantage i think in order to understand uh how the plan works and all the ins and outs of it a little bit of context is is in order and i'm going to start with a brief history of the plan the plan was unveiled back in 2009 by jim flaherty who was the conservative minister of finance back in the day when it came out there was a lot of misunderstanding of how it worked however the cd howe institute said back at the time this tax policy gem is very good news for canadians and mr flaherty and his government deserve credit for a novel program at the time a lot of the large groups large business groups like the chambers of commerce etc really supported this type of plan as something that we could build on to create extra wealth for canadians as time goes by let's look at exactly what a tfsa is first and foremost the number one thing you need to understand about a tax free savings account is that it is an account now that might sound pretty obvious however a lot of people still are under the impression that a tfsa is an investment and not an accountant of itself think of it as a jar or a bucket as a holder and you put certain investments in there a major feature of the tfsa is that growth inside the plan is tax-free and that's uh like an rrsp where you put money in and it grows tax-free over the years a big differentiating factor from a tfsa however is in a tf or from an rrsp is when you take money out of a tfsa you don't pay tax on it so a lot of canadians are familiar with rrsps when you put money in you get a tax deduction when you take money out you include that income uh that income on your income tax return and you pay tax at that point a tfsa is almost the opposite you put after-tax dollars in to the plan it grows tax-free and whenever you withdraw that money you do not pay tax on it there so they're kind of at the opposite ends of the spectrum they're both are very valuable depending on your purposes when you put money into the plan as i mentioned it's not tax deductible there is no income tie to tfsas unlike an rrsp which is the contribution room is based on your income in a tax-free savings account whether you have no income or whether you earn a million dollars a year there are annual limits that the government puts on and we'll cover those off in a few minutes here but everybody uh every canadian 18 years or older has the ability has the the option of contributing to an rrsp again that differentiates it quite a bit from an rrsp one other difference i will note as well is a tfsa is not protected against creditors let's talk now about who can have a tfsa in the first place a few pieces of criteria number one you have to be an individual companies can't have tfsas it's for individuals you have to be a resident of canada you have to have a valid social insurance number and you have to be 18 years or older quick note in some provinces the age of majority is 19. so you can't actually open an investment account until you're 19 years of age if you live in one of those provinces you still are eligible for a tfsa at age 18 and uh although you can't open the account until age 19 you do accrue that year's worth of room so you're not losing out on the actual dollar amount but you are losing out on the time that you would have that account available to be invested in a couple of other features number one is there is no upper age limit on a tfsa lastly there are very special rules that apply to non-residents of canada so citizens of canada who are living abroad i'm going to cover those off in more detail a little bit later in this video let's talk about contributions to the tfsa because this is an area that is um there's a lot of confusion and i'm going to try and sort of clear that up for everybody here today the contribution room is calculated by the following formula you use the tfsa dollar limit of the current year plus any unused tfsa contribution room from previous years plus any withdrawals made from the tfsa in the previous year we're going to get into some examples of what this actually means but that's that's the formula that you use that you use to determine how much you actually can contribute to the tfsa now when the program was launched the maximum for that year was set at five thousand dollars there is an indexing feature of the tfsa contribution room or the amount and every year it is indexed to inflation now it doesn't change every year the way it works is as inflation increases the amount there is a there is a build up or there's an accrual of that room when it reaches 500 that is now added to the to the next year and we're going to see if we look at this this chart this table on the screen here we're going to see that again in 2009 the limit was 5 000 and in fact that amount stayed consistent through to 2012. in 2013 that inflation or the cpi feature kicked in and the amount was raised to 2 to 5 500 and it remained the same through 2014. now you'll notice on this table the real anomaly in 2015 and the the final budget before the general election in that year the conservative government raised the limit to ten thousand dollars now i'm certain there was some political uh reasoning to do that and they so you'll you'll notice in that year in 2015 there is a 10 000 contribution limit for that year well the liberals won that election and they smacked that right back down to 5 500 in the following year and it remained there for 2016 2017 2018 and then again the inflation factor kicked in and in 2019 20 and 21 the contribution number has been six thousand dollars uh ever since then what this means in summary here is that if you were if you were 18 years or older in 2009 and you have never contributed to the tax free savings account because that room is carried forward every year you could contribute 75 500 today in 2021. now if you weren't 18 or older back in 2009 there's some math that you have to do to calculate uh how much you're eligible to contribute now i have prepared a table here that will help you in that endeavor and down the left column if you look at your birth year it will say a couple of things it'll say the year that you turned 18 the age that you are in 2021 and the approp the according uh amount that you're able to contribute as a lump sum if you've never contributed before let's just use the year 2000 as an example if you were born in the year 2000 you turned 18 in the year 2018 and of course this year 2021 you're 21 years old you would have an accumulated amount of 23 500 that if you have never contributed before you can use that now important to note though is that growth within the plan is not counted as a contribution it's only money that you actually put into the plan so as a quick example if you turned 18 this year and you're eligible to put your six thousand dollars in let's say you did that that six thousand has now become seven thousand dollars your room isn't affected by the thousand dollar growth in the plan it would always be related back to the six thousand dollars that you put in another note as well is uh losses within your plan don't count as withdrawals or it doesn't adjust the amount same philosophy if you put six thousand dollars and then let's say you bought one of those fantastic meme stocks right at the peak and it's now worth a thousand dollars well that five thousand dollar loss that you took on that isn't going to create additional room it's all happening within that jar or within that bucket we talked about earlier and so um you just have to look at the actual number of contributions that you made to the plan to determine what your room is it's not always easy to determine exactly what your room is uh to put in the plan but there are a few ways that you know you can get help in doing that number one cra has an account that a lot of people have signed up for now called my cra for individuals and you can go on there and it will show you with some degree of accuracy not a percent though uh what your room would be and it will show you the history of your tax free savings uh contributions when i say it's not 100 accurate because it does take some time earlier in the year to have those numbers updated because they're waiting for information from the various investment companies that feed it to them and so use that as one of the methods to determine but always compare that with your own numbers uh the cra does have a mobile app that also will provide the same information if you work with an accountant and you have an authorized representative that person can also get the information and provide it to you directly from cra and there's a there's a uh 1-800 number 1-800 uh it's a tips line uh the number i'll put on the screen here 1-800-267-6999 and they also will be able to provide you with the most up-to-date information as to what room you have the best way of doing this i think as the first go-to is to keep track of it yourself and it is complicated in order to help you out uh we've created a a worksheet that will give you sort of a if you put the accurate history in it'll tell you what the room is and i think we've got it designed for another 10 years or so it'll go out so you can put right back from 2009 up till today and then you that will serve you uh in years ahead as well if you accurately enter the information uh feel free i'll put a link in the video down below and you can use that to help you keep track of your contribution room as well so once you know what that number is the next step is you got to get started and actually open up a tax free savings account and get some money into it there are three official types of accounts that you can open you can open a deposit account you can open up an annuity contract or you can open up what's called an arrangement in trust and it's kind of a fancy name but basically what that means is you're going to open an account with a bank and investment company with quest trade for example and put your money inside there it's a trust arrangement the facilities where you can do this or the institutions you can do it at a bank like i say insurance companies will offer this credit unions trust companies investment dealers all of these places where you would normally go for example to open up an rrsp they will be able to open up a tax-free savings account for you as well so once you've got your account opened up the next step would be to actually contribute some money to the funds this would be your first contributions within the limit that you're uh that you're restricted to there and then make some investment decisions as to what you're going to do with the money in there i will note that there's also the ability to do what are called transfers or more specifically in-kind transfers and this would be applicable if for example you had another investment account right now and you wanted to just move some money so let's say you had shares of royal bank in an investment account and you felt you would rather use that money inside of your tax-free savings account you can take the money from your non-registered account and transfer it into your tfsa and you will get credit for the dollar amount now the the amount that you get credit for contribution is the fair market value on the day that the money is actually received or posted to the tax free savings account important to note though um there are a couple of things if if the amount you're you're transferring has gone up in value that will be a uh a taxable event or what's called a deemed disposition so let's assume you put five thousand dollars in shares of a company it went up to say six thousand dollars and you transfer the full six thousand dollars in that will trigger a thousand dollar capital gain that you will be liable for even though you haven't really necessarily sold those shares but um it will go in and you'll have to pay that gain in your in your tax preparation for that year conversely if you put five thousand dollars into royal bank and it went down to four thousand dollars if you simply do a transfer into your tfsa you won't get credit for that capital loss and that's really important to understand that generally if you have a gain and a loss they can offset each other in a non-registered account but in a case where you do a transfer you don't get credit for the loss so be uh be wary of that or be aware of that and a solution would be if this is if it makes sense for you to do that that transfer is to sell anything that's at a loss first and then move the cash into the account then you will be able to uh actually you know you've liquidated that investment before the transfer so you will get credit for a capital loss on that it doesn't make any difference on the gains whether you sell it first or whether you transfer it directly you will be liable for taxes on that regardless another transfer type that you can do is you can transfer from an existing rrsp or a rif uh into your tfsa it will count as a withdrawal so you have to be aware that of that you can't just take a money from a registered account and move it into this into your tax free savings account without any tax implications on that but there may be occasions there may be circumstances and i'll talk about those more a little bit in the video um about that where that may make sense to do that again the fair market value of the asset that is transferred in on when it's received is what is going to be counted as your contribution to your tfsa so once you have your cash in your tfsa what can you do with it what types of investments are available and again another real big area of confusion here although over the years people are getting a little bit more and more savvy as to what the options are within a tax-free savings account i'll generalize and say that the investments that you can have inside of a tfsa are very similar may be exact or very very similar to what you can have in an rrsp examples of those are just put straight cash you can have gics term deposits most securities so stocks that are listed on a designated exchange can be used inside of a tax free savings account there are warrants and options if you trade in say for example puts and call put in call strategies you can put those mutual funds segregated funds canada savings bonds provincial savings bonds or corporate bonds you can put insured mortgages into a tax-free savings account and certain shares of small business corporations and there's some restrictions i want to talk a little bit later about what are eligible or what are qualified and non-qualified investments so there are locations where you could put shares of a business inside your corporation as well if you make a contribution of what's called a non-qualified investment or a prohibited investment cra takes this very seriously and you don't want to go there there are t additional taxes that apply and i will cover this off in more detail later but it's it's significant and it's not a minor issue so if you uh have or you may have these types of investments into in your tfsa you really need to pay attention that because it can be very very costly so now you've got money in your tfsa you've got it invested you want to take money out so how do withdrawals work generally speaking you can take money out of your tfsa at any time there's um there are no tax consequences there are i guess some exceptions which we'll cover later but for the most part the money comes out of the tax-free savings account as the name implies uh tax-free important if you receive any government benefits such as old age security guaranteed income supplement employment insurance canada child benefits canada workers benefit or if you have the age the age amount that some seniors will get and or a gst or hst tax credit none of these benefits none of these amounts will be affected by money that you take out of your tax-free savings account so that's a real almost like a rare bonus where you're not penalized uh for that type of income because it doesn't count as taxable income i want to speak for a few minutes about uh when a tax a tfsa holder dies because it happens and there are some serious tax concerns or issues that you should be aware of to make sure that this process or the the movement of the money from an estate to an individual goes uh you know as smoothly as possible there are uh tax implications that basically come down to four different criteria number number one is the type of the beneficiary will affect how it's taxed the type of the tax-free savings account itself actually matters if the person dies and then there's income earned inside of that tax-free account after the death that may or may not be taxable depending on the circumstances and how long it takes from after the death until the money is distributed uh will factor in as well there are two types of beneficiaries there's what's called the successor holder and this is a special designation that is limited to a spouse or a common law partner in a relationship the other more generic type of beneficiary is simply called the beneficiary and this could be a former spouse or common law partner it could be your children it could be qualified donors such as charity groups etc the way that the money is distributed after death will be determined by the actual contract itself the tfsa contract or a will it can be directed by a will and in certain jurisdictions for example in quebec there are restrictions around naming a beneficiary inside of a tfsa and so you have to be aware of the region of the country that you live in and how that might impact the distribution of assets from the plan once someone has passed away i want to talk for a moment about this assessor holder designation and if you are married if you are a spouse or if you're in a common-law relationship i would say almost always but certainly generally speaking you want to be designated as a successor uh holder uh not a beneficiary directly when you become or when you're named as a successor holder you essentially when the person dies that tfsa becomes yours immediately there's no uh transfer there's no tax there's no gap from when the person passes away until um you you know the money goes into your name another factor is that as a successor your room in your tfsa is not affected so if a successor holder is already maxed out on their tax-free savings account they can inherit an entire new tax-free savings account fully maximized or even more without affecting their room that's really important you do need to have a social insurance number to be to receive that money in most cases you would already if you're a non-resident you can apply for a cra individual tax number in order to receive those funds if you don't already have one now if there is excess funds or if there are excess funds in the tax-free account that you're inheriting the tax penalties that that entails and we're going to cover those off more later applies to the deceased holder to the estate it doesn't hold you know up until the time of death so you're not going to be penalized for excess tax implications that occurred before the person passed away but when you when you receive the amount it will be the amount that you receive will include that excess amount now if you have room in your tfsa not a problem that amount just goes in there but if that puts you into a an excess situation as well you're going to have to take steps to remove that from the plan in order to avoid the penalty which is you know one percent a month which is uh which is very stiff now if you're a beneficiary who's not the survivor not the spouse of the person who passed away you do receive the amount of the plan now if you have uh available room inside of your tfsa you could make that contribution to your own tfsa if not it just becomes uh in money that you've inherited but you don't have the special treatment of the tax free savings account any longer there are special rules that apply if you're a beneficiary but you're a spouse so in other words if you're not named as a successor holder but you're named as a beneficiary and you are a spouse special conditions apply so first of all you may designate all or a portion of a survivor payment as an exempt contribution to your own tax free savings account and this won't affect your own unused room the amount must be received during what's called the rollover period and that begins when the tax the tfsa holder dies and ends the end of the calendar year that follows the year of death in this situation you must designate it as an exempt contribution and there's a form rc240 that you use from the cra and then once that's done you must send the form within 30 days after the contribution is made it's important to note that the the total exempt contributions can't exceed the fair market value as of the date of death so when the person passed away if their account value was x that's the amount that you can contribute into your own tax free savings account any growth from that point on would not fall under this exempt rule there are also specific rules that apply to non-residents let's cover those off very quickly right now number one if you are a non-resident from canada you are still able to keep your tax-free savings account a lot of confusion out there today but you don't you're not forced to liquidate your tfsa because you become non-resident in status however you cannot contribute after you've moved you can contribute up until the day that you become a non-resident but once you become non-resident you cannot contribute any more to the plan also no room accrues to the plan one final comment on the non-resident situation is if you have a an excess amount that is in your tax free savings account when you're a non-resident you have to withdraw that or you'll be subject to a one percent penalty per month now that differs from being a resident if you're a resident you are taxed one percent of the value of the uh over contribution whereas imagine you're over contributed by six thousand dollars uh as a non-resident and you withdraw five thousand nine hundred of that you will still continue to be taxed one percent on the full amount uh you don't get credit for taking some of it out you have to take all of it in order to remove that ongoing penalty so very very critical if you're in that circumstance that you address that as soon as possible i want to move on now to some common mistakes that are made with tfsas and hopefully with information i'm about to share with you you can avoid these and and really they are quite common the first one we see all the time is when you transfer from tax free savings account to tax free savings account that is a simple process any investment company out there will help you do that but you do need to make what's called a direct transfer from tax free uh savings account a to tfsa b it's not that uncommon that someone might just say i've got you know five thousand dollars over here at the royal bank and i want to put it over at my account at the td bank where they might just sell it and take it out and make a new contribution to the to the new bank that doesn't cut it what it does is it actually counts as a withdrawal from your plan and then it counts as a contribution to a new plan now if you don't have enough room if you don't have the available contribution room that will actually put you into a an over contribution room if you have room you can do it that way but the best way to do it is to just do the transfer directly so it doesn't count as either a withdrawal or a contribution another mistake i hear all the time is this blanket advice never hold the us stock in your tax-free savings account you are going to hear that from all kinds of different sources i just vehemently disagree with that the the concept of the advice is that if you hold the u.s stock inside of your tax-free savings account and it pays you a dividend then there's a withholding tax of 15 that applies to that u.s dividend and that in and of itself is is causing people to say never do it imagine if your only investment is a tax-free savings account and you're building up your wealth and your portfolio by having uh by by using that account which is a good strategy are you telling me that you should only ever put canadian investments inside of a tax-free savings account um i would you know strongly argue against that if you have a tax-free savings account and a an rrsp and they're you know both forming part of your plan and you have to differentiate between the two well then you could make an argument that says hold your u.s companies inside your rrsp and hold your canadian companies inside of your tfsa but there's so much more to that goes into building and managing an investment portfolio then then just that it's really not that simple you need to be aware of the 15 withholding tax like you need to be aware of any other type of tax but if you are making uh portfolio investment decisions based solely on that one factor you're not doing it right so make sure that you have a bigger picture make sure you invest first and then you determine the best placement of those assets depending on your entire tax situation not just you know one sliver of things that you need to consider another mistake that people make a lot is uh recontributing you withdraw in one year and you recontribute back in the same year there is a provision in a tax free savings account that if you take money out that uh the room the the amount that you took out is added to your room for the following year but if you're already maxed out in your tfsa and you take out say five thousand dollars in january and if you put that five thousand dollars back in at any point during the year and you don't have that room available that will put you into it over an excess contribution scenario where you're going to be paying that that tax so um really important a simple mistake to make but um you don't want to do that another error that people make uh it's it's possible it's quite it's quite okay to have more than one tfsa you can have as many tfsas as you want however it's easy to lose track of what you've contributed to each plan so i've seen where you have uh you know maybe three different banks and and three different tfsas and if you've got maybe an automatic contribution going into one and you you know you're putting money ad hoc into another you just have to be really sure that you don't over contribute uh because you're you know losing track of where you're putting where you're putting your contributions another big one is and this goes right back to 2009 when the when the tfsas were first introduced is people just throw their entire risk profile their investment strategies out the window when it comes to tfsas and i remember back in the day where there's two conflicting uh points of view one is well gee a tax free savings account if you you know get a you invest in the in the company goes up a thousand percent you can sell that without paying any tax and that's perfectly true if you're a person who is inclined to buy high risk speculative investments you can make an argument for that most people aren't so the fact that you would say gee if i if i nail this i can make a whole bunch of money without paying tax on it if that's the determining factor and you're normally a conservative investor well that's not a very good strategy because there's also a flip side to that if that investment goes to zero or you lose a lot of money on it you also um you know you you lose that you don't get the benefit of a uh an offsetting tax deduction the obviously the risk versus reward if you're a conservative investor and all of a sudden you're buying you know shares of some speculative penny stock inside of your tfsa you're running the risk of of losing that money which may be way outside of your comfort zone always again look at it from a portfolio perspective and you don't just become more conservative or more aggressive overall because of the fact that you have your money inside of a tfsa account although again i i've heard that for the last 13 years now um that that you've been able to contribute to a tax-free savings account i've seen that strategy another mistake is we talked about this earlier calculating how much money you have available in your tax free savings or contribution room rather is don't rely solely on cra i mentioned that early in the early months of each year it takes a while for them to update their records so if you're anxious to make a tax-free savings uh contribution nonsense in january of of any given year good chance when you go to cra's website and look at an amount that you can put in there it's probably going to be wrong so use that as a resource you know combine it with your own math use the spreadsheet uh that we've prepared uh if you want to use that as a tool but in order to avoid penalties you always want to make sure that you are aware of what your contribution room is before you put yourself into a dicey situation i want to talk now about a few simple strategies that you can use to make make the most of your tax free savings account starting with income splitting in most in many accounts you can't just give in many circumstances you can't just give your spouse money believe it or not you can't give yourself money to invest without having that attribute back to you a tax-free savings account is an exemption to that you can actually give your spouse money to invest in a tax-free savings account so if you have two people and one has little or no income you can take that annual amount or a lump sum amount give it to them they can contribute that to their tax-free savings account and as a family you're going to end up saving uh you know quite a bit you potentially could save quite a bit of money over the years so that's something that you need to be aware of and and should use if it works to your advantage another advantage another strategy is if you know early in a calendar year you're going to be taking money out of your tfsa for whatever purpose it may make sense to take it out later in the year prior so in 2022 you know we're getting close to the end of 2021 if you know in january 2022 that you're going to be taking money out of an rsp it might be a good idea to take money out in december of this year that way you get that room back in 2022 so if you take out say ten thousand dollars in january next year well you won't get that ten thousand dollar contribution room available until 2023 whereas if you take it out in december even december 31st of this year you'll have that room available if you have the cash flow available to put it back in in 2022 early in the year another strategy you might use is helping your children a lot of adults help their children whether it's you know for schooling whether it's for you know helping with housing that type of thing you can give money or gift money in this case to a child as long as it's an adult child you can freely give gift them money um they will from that point on be responsible for the taxes on that money but if they put that into their own tax free savings account you're going to be able to help them out rather than just taking money that you've paid tax on and and give it to them that way there a question that comes around all the time is should i put money in my tax free savings account or my rrsp um there is no silver as there's no silver bullet there's no universal answer to this it depends on so many factors but a few things to consider might help you if that's a decision that you're grappling with right now first of all it depends a lot on your income level so let's look at what income level might dictate a decision one way or the other first of all if you have a low income if you have a low income rrsps may be of little value now it could be just you just have low income forever or it could be you're in a period of time right now where you know maybe you're on maternity leave or maybe you've taken some time off work or uh you know just your income in 2021 for example will be lower than it normally would be in this case the the decision skews more towards putting money into the tax-free savings account because you're getting little bang for the buck in the rrsp in any event you can put the money into your tax-free savings account it's going to get the benefit of growing tax-free if at some point in the future let's say you go back and you're and you're um your income is higher at some point well you can just take the money out of your tax-free savings account or transfer it into your rrsp at that point get benefit for the contribution and um you know you're you're not losing the ability to put it into your rrsp at some point so i would say if you have a low income the decision skews more towards putting money into a tax-free savings account middle income gee somewhere in the middle and this is uh you know there's a it it uh it always comes down to a number of different factors but if uh the a scenario i just sort of explained if you expect that your middle income now but your income is going to be rising at some point or going lower at some point um you might split the difference you might put the money some into the rsp some into your tax-free savings account uh you're gonna be getting some benefit from the tax deduction um however if it's a lower benefit you know just you can split the money or very commonly what people do and i'll talk about this with high income earners is make a contribution to your rrsp take the tax refund and put that into your tfsa you could also use the tfsa as an emergency fund if that's something that you feel would you know everybody should have an emergency fund and if your tax-free savings account is your emergency vehicle then that's an option you have to use that uh for that purpose as well if you're a high income earner now i would say in this case in many cases the decision skews more towards putting money into your tax or into your rrsp you're going to get a bigger bang for the buck a bigger tax deduction save taxes today yes at some point down the road you are going to have to take that money out you will be liable for taxes then but this may be a classic example of putting money in getting it at a you know getting a good deduction taking that tax deduction and putting it into your tax free savings account that's a reasonable i would say compromise because you know it's not really always just it's not one or the other uh in this scenario that's something you probably should uh should be considering lastly here i'm going to talk about some misconceptions and some myths and and misunderstandings uh i may have touched on some of them earlier but i just want to make sure that these are sort of solid in your head if you're going to go and have tfsas first of all remember tax free savings account is an account it is not an investment and even today i hear people say things like oh yeah i have an investment i have a tax free savings account or i have a tfsa well what is it invested in it's in a tfsa without any idea of what the actual investment choices are in this goes right back to 2009 when it was marketed that a tfsa is an investment it's not get that out of your head make sure that money inside of that plan is managed properly another misconception you hear a lot is if you take room uh if you take money out of your tfsa you don't get it back i see this all the time there's confusion out there if you uh as an example let's assume you've maximized your 75 000 that you're able there's 75 500 that you're able to put in if you're 18 or older as of 2009 that money has now grown to ten thousand dollars well if you take that full sorry it's growing to a hundred thousand dollars you can now if you take that full hundred thousand dollars out and put it uh you know take it out of the tfsa in 2021 you can put that hundred thousand dollars back in in 2022 a lot of people will argue no you can't you can only put the the limit or the contribution amount that's not the case you can put the entire amount that you withdrew growth included back into your tfsa the following year a lot of misconception out there misunderstanding about what are called over otc over-the-counter traded stocks a lot of foreign countries have what are called adrs or uh american depository receipts that trade on u.s stock exchanges but they trade on what's called the over-the-counter exchange and there's a lot of misconception that you cannot hold those inside of your rr your tax-free savings account you can as long as the security is traded on a designated stock exchange and there are many of them around the world you can in fact hold those even if they're trading over the counter in the united states you can put those inside of your tfsa a designated stock exchange is defined as a stock exchange or part of a stock exchange for which a designation by the minister of finance under section 262 is in effect i'm scrolling a list for these companies right now so if you see a company that trades on one of these exchanges it will be eligible for tax free savings accounts as well so when you hear online that you can't i hope this clears uh that up another tfsa related issue that we hear constantly is things like well you can't place a whole bunch of trades inside of your account or the cra is going to come after you you can't day trade inside your tfsa and this has caused a lot of confusion the issue isn't whether you are placing frequent trades inside your tfsa the issue is more related to are you carrying on a business there are six major factors that that the courts ultimately would decide if you are carrying on a business inside of your tax free savings account i'm going to list those off here number one what is the duration of the holdings you're buying and holding for minutes or hours or even a few days at a time that will be one of the factors that the courts determine and this is where probably the day trading issue is sort of most prominent the volume of trading that you have are you constantly trading or are there trades uh in addition to the duration but you're trading a lot the time that you spend trading in other words if your day is spent trading it could be interpreted that you are actually running a business here and not just investing the types of investments that you buy matter and it comes down to are you buying penny stocks are you buying speculative investments and flipping here and there whether you're making money or not um or are you buying you know long-term if you're buying gics or you're buying long-term uh blue chip type companies that is one of the uh one of the factors that will be determined as to whether you are going to have your the tax-free nature of the account taken away your experience in the uh in the investment world matters as well if you are a veteran investment advisor and your activity inside your account is you know multiple times a day or a week you're making trades that will factor in and lastly uh what they call purchase intent so when you make the purchase of a company um you know are are you what's the intent of it are you intending to hold it for long term and then maybe something happened and you changed your mind but if there's a pattern of constantly buying with the intent of doing it on a short-term basis you're not going to get benefit of the tax-free nature of the tax-free savings account people will say all the time and it's true if you go to cra it doesn't spell out what this what the limits are these factors all have to come in and probably one of them in isolation doesn't make a tax free savings account ineligible for those benefits but when you look at a combination of them that's where ultimately cra may deny your tax deductibility and if you go to court the courts are going to use those factors to determine whether in fact you do enjoy uh the tfsa benefits or not the last thing i want to address today is this myth that tax-free savings account are always tax-free usually they are but not always it i'll go through some circumstances where they're not first of all i may have touched on some of these earlier but if you have an extra amount if you've over contributed to your tax-free savings account you will pay a tax penalty on that and that penalty is significant it's one percent of the the highest value per month so it's essentially 12 a year and i mean that's a huge i mean some credit cards are probably uh charging less interest than that so this is not interest per se it's a tax penalty but you have to make some pretty good returns on that extra contribution to me you know to make up for those losses there's also what are called prohibited investments in general prohibited investments are investments where the account holder has a close relationship with uh with the company that's being owned inside uh the the sort of the threshold or there's a couple of different criteria that need to be factored in once one is if the account holder owns 10 or controls 10 or more of the company uh that would be a factor and also if they um if they don't deal with the company at arm's length so um in a case like this you're not eligible to hold that investment inside of your tax-free savings account there are severe penalties if you do this i'll cover those off in just a moment along the same lines there's also investments that are called non-qualified investments and an example would be a company that does that is not trade on a uh a stock exchange and so if you end up with a with a with a non-qualified investment the penalties are going to be the same as well they're going to they're actually very similar between the the prohibited and the non-qualified let me go through what those uh penalties are right now first of all you're going to pay a 50 tax on the fair market value of the property uh at the acquisition of it or when it became non-qualified or prohibited so there are occasions where you may own something that becomes an unqualified asset you're going to pay a 50 tax on the fair market value of that property also you will pay a hundred percent tax on any income or capital gains that you derive from that investment so if you are aware of something that might be prohibited or not qualified in your in your tax free savings account make sure you address those they are very serious now there are some circumstances where you may be eligible for a refund on part of that for example if you disposed of or or if the investment stopped being a prohibited or non-qualified investment before the end of the calendar year after which the tax arose you may apply for some relief from cra on that now this does not apply if you knew or you should have known that the investment was prohibited there's occasions where this just crops up you've never heard of it and uh and so the cra gives you some leeway there but if you knew this was prohibited and there's evidence of that they're going to deny their refund on that also note that the 100 tax that applies to the capital gains and the income uh that's not going to be refunded under any circumstances that that i'm aware of we've covered a lot of information today regarding the tax free savings accounts and as i said at the at the introduction they're a very valuable tool they're a misunderstood tool not everything related to tax free savings account is straightforward and there are you know the rules change from time to time as well so when i put this video together i considered should i break it into smaller chunks which i think is more youtube friendly but i wanted to build a resource that people can go to that sort of covers off pretty much all of the major questions that people would be uh would be interested in and you know there'll be bookmarks in the video so you can go back and if there's a refresher you want a particular topic you'll be able to go back and review that so i i'm going to wrap up the video today i'm going to remind everybody that we do have our investment academy which will be in the first link below and that academy is growing uh literally every month we're adding new resources and if it's something you've been thinking about or something you want more information on just click that link and um and you know have a browse through the website there this has been a long video i'm going to thank you very much for taking the time to to watch and i look forward to seeing you in the next video

Channel: Brandon Beavis Investing

Views: 69,316

Keywords: TFSA, Tax Free Savings Account, Canadian Investing, Investing for Canadians, TFSA Guide, TFSA Rules, Canada Taxes

Id: 0AfSYbhSsFQ

Length: 44min 12sec (2652 seconds)

Published: Sun Sep 12 2021