Tuesday, February 26, 2008

Budget reaction -- Hooray for TFSA!

I really can't emphasize enough how pleased I am by the prospect of the tax-free savings accounts the Tories unveiled in the budget today.

The star's James Daw has an excellent recap here, and Canadian Capitalist offers his usual insightful analysis here. ROB's Rob Carrick chimes in here. I suspect the Canadian personal finance blogosphere will be all atwitter with TFSA-related posts in the very near future, but for those to lazy to click, here's the 10-cent version of what's happened. Starting in 2009, Canadians over the age of 18 will be able to deposit up to $5000 a year into these accounts, and will never have to pay any tax on interest or capital gains on assets within the account. There's no limitations on taking money out of the account, and in fact investors will be able to reuse contribution room after making withdrawals. As some astute readers on CC's thread have already pointed out, the TFSA will function a bit like a Canadian version of a Roth IRA -- albeit an even more flexible one.

There are a lot of things to like about this. I'm particularly impressed by the fact that there doesn't appear to be many restrictions on what the funds have to be used for -- as opposed to RESPs and RRSPs which can only be cashed in under certain conditions, and are subject to taxes and penalties for breaking those rules. Even if the upside doesn't end up coming in as advertised, at the very least this proposal is bereft of downside. Whether it's to save for a downpayment on a house, an emergency fund, or a conventional taxable investment account for stocks and ETFs, I can't see any reason why Canadians wouldn't use these new TFSAs as a potent wealth-building tool. I can assure you, time is running out for my taxable investment account once these little beauties see the light of day, although I do wonder what sort of tax implications there would be for transferring stocks out of a taxable account into TFSA. Would the CRA consider me to have sold them and repurchased them as they do when you transfer stocks into an RRSP? I suspect so, but time will tell.

The only "bad" thing (such as it is) is that unlike RRSP contributions which are tax deductible and thus give me a nice fat cheque every April, TFSA contributions aren't. So the government isn't paying me to save for my future, as they do with RRSPs. But on every other level, these accounts help make it more and more worthwhile for Canadians to start saving more -- unless I've missed something, 100% of every dollar you earn from an investment in one of these accounts goes into your pocket at the end of the day, a claim that can be made of very few things. You have to like that.


Canadian Capitalist said...

Thanks for the link. I am as enthusiastic about these new accounts as you are and I don't understand some of the criticisms I read today that said the tax savings are so little after the first year, instead of taking a longer term view.

Krupo said...

I can only imagine how hard the bankers and investment advisers are salivating over TFSA (How will we pronounce that? "Tfffsaws" Kind of like Pshaw, but with a tfs instead...).

I think your guess about the treatment of accured cap gains will be correct, if only because once they're in, they're "clean". Thinking strategically, you may want to TFSA new purchases rather than transfer an existing investment (if you have that option - i.e., spare cash).

I predict a kick in certain investment prices when people start doing that in earnest. :)

The "bad" as you describe it makes sense, of course, from a tax perspective - it's the ying-yang to the fact that you can pull money out of the TFSA with 0 restrictions. RRSPs have those nasty penalties because they're set up to encourage to make you to wait until you're nice and old.