With the upcoming tax free savings/investment account in 2009, my mind has been racing about what exactly to do with the account.  Between my wife and I, we will have $10,000 worth of contribution room available to us in the first year which we intend to fully maximize.

How do we intend to use the account?  I’ve written a few ideas in the original TFSA column which I’m going to expand on below.

1. Income Fund

I am a big fan of passive income which is evident in my dividend investing endeavors.  One idea that I have for a tax free investment account is to invest for income.  The reason being is that the income is completely tax free.

With my leveraged account, I don’t invest in anything that produces a return of capital like income trusts or corporate mutual funds.  However, since taxation isn’t an issue with the TFSA, I will be looking into consistent high yielding equities to produce a tax free monthly income.  Some equities that come to mind are REITs and income trusts like Canadian Oil Sands.

Thus far (as of Jan 2, 2009), Questrade is the first and only discount brokerage to offer a tax free trading account.

2. Aggressive Trading

Another idea is to use the TFSA for aggressive equity/options trading.  This one is not as attractive as investing for income as capital losses cannot be claimed within a TFSA account.  On the other side of the coin, gains will not face any taxation either.

One lower risk options strategy is to write call options for equity positions that you already own.  With this strategy, you set the price that you are willing to sell your position for, but collect a premium in the process.  If the stock price raises above your limit before the expiry date, you will be forced to sell.  However, if the stock price stays flat or goes down during this time, the option will expire.  The result?  You get to keep equity position and your premium collected.  If you like, you can keep writing call options and collecting those premiums.

Check out this link for a detailed series on how call options work.

3. Credit Card Arbitrage

When I wrote about credit card arbitrage before, I came to the conclusion that the strategy wasn’t worth it due to the thin spread between borrowing and accumulated interest after taxes.  However, using a TFSA in conjunction with this strategy eliminates the taxation on the earned interest and makes the strategy more feasible.

Basically, take the free money that select 0% credit cards offer, deposit it into a high interest tax free savings account (approximately 3% these days), and collect the tax free returns on the free money.  The biggest caveat being to watch the dates when payments are due.

4. Emergency Fund

This is perhaps the most popular solution for the TFSA as it will allow people to let their “emergency” money grow/withdrawn tax free.  While there’s nothing wrong with using the TFSA this way, there might be a bigger potential with using the TFSA as a retirement account.

What do you plan to do with the upcoming tax free savings account?

80 Comments

  1. Sampson on January 9, 2009 at 2:08 pm

    Has anyone actually made in-kind transfers of existing holdings into their TFSA’s? I’m in the process, and just realized that its best to wait until the markets are down, therefore we can squeeze more units/stocks into the TFSA.

    I suppose just as long as I get the US and US ADR dividend paying holdings in before pay-day then I should be able to benefit from the tax-free status. Perhaps I’ll be waiting for a dip in the market? Hmm. Any good advice on how to ‘time’ the market? I don’t think I’d make a very good stock ‘daytrader’.

  2. ron87 on January 13, 2009 at 6:22 pm

    I was just on the ING Driect website. And I read that the maximum contribution room an individual can have is $5000. Is this true? Or is there a way to increase your maximum contribution room?

  3. Craig Sadler on January 13, 2009 at 10:24 pm

    ron87 that is true…the TFSA contribution room is $5000/year

  4. Maxtron on February 7, 2009 at 10:50 pm

    Hi, this is my first post, I’m kind of new at this. I just jumped in with trading stocks with my TFSA and I think I dove in the shallow part of the pool. I’m currently trading US stocks because I tought I would save the taxes, since I believe the dividends are taxed as interest income. Now here is the problem, this is an email I have received 2 days ago from Questrade.

    ”… The U.S. government does not recognize registered education savings plans (RESPs) or tax free savings accounts (TFSAs) in their current tax treaty. All USD income earned in these accounts will be subject to applicable taxes.”

    Can someone please shed some light on how this will impact my capital gains and dividends.

    Thanks!

  5. DK on February 9, 2009 at 12:18 pm

    Maxtron,

    In a nutshell, U.S. dividends are taxed at 15%, or 30% if you have not filed a W8-BEN with your brokerage. These amounts will be withheld by your broker.

    Your capital gains are not subject to U.S. tax.

  6. Maxtron on February 9, 2009 at 1:55 pm

    Thank you DK for your reply!

    Seems like I didn’t brake my neck after all… Not yet anyway… :)

  7. Al on March 31, 2009 at 4:51 am

    Has anyone considered over contributing to the TFSA and eat the 1% a month so long as you can make more than 1% a month you should still be a head of the game.

    I’m a pretty decent trader and make on average 5% on my portfolio each month. So i’m thinking i eat the 1% a month for the first 6-12 months and then pull out my over contribution amount leaving my capital gains in the account to continue to trade tax free. :)

  8. Jordan on March 31, 2009 at 10:09 am

    Wow, 60% annual returns… what’s your secret?

  9. Toban on May 12, 2009 at 11:42 am

    Income trusts are the perfect match for the TFSA because their income would be fully taxed if outside the TFSA. But in 2011, trusts are going to be taxed, so from what I understand they’ll be given the dividend tax credit. Dividend income would defeat the purpose of the TFSA, because it’s hardly taxed anyways.

    Are there any high yielding investments that can take full advantage of the TFSA post-2011?

  10. Sampson on May 12, 2009 at 12:35 pm

    Toban, REITs (most if not all) will be exempt from the 2011 change in taxation laws – presumably they should be able to maintain high distributions. After that, it may be a matter of shifting bonds and other interest paying investments, as well as foreign dividend producing equities into the TFSA for me.

  11. Amit on July 28, 2009 at 5:13 pm

    How is this low MER Claymore Global Monthly Advantaged Dividend ETF for TFSA?

  12. Morning-wood on August 7, 2009 at 5:34 pm

    Responding to the fact that Questrade is the only discount brokerage with TFSAs…

    I was looking at this and I see a bias towards Questrade. It seems fishy.

    I use Q-trade and I am happy with it and it has won numerous awards from the Globe and Mail.

    I had my TFSA set up with Q-trade BEFORE the end of 2008 so whoever is pushy Questrade outa do their research

  13. Stuart on November 23, 2009 at 4:23 pm

    After using both Qtrade and Questrade I can honestly say that I prefer Questrade. Qtrade has better research tools, while Questrade has much better trading costs and I prefer their customer service.

    As for TFSAs, I am of a similar state of mind as Million Dollar Journey, that the best holdings in these accounts is Income Trusts. I have written articles about why I believe this on my blog and even have a page dedicated to displaying my actual TFSA holdings, which is kept up to date. Bascially, I believe the TFSA should be use for investments that would normally be tax inefficient and still have capital gains potential. As a result of the new legislation regarding Income Trust Taxation coming for 2010, I have decided to fully fund my portfolio with Income Trusts.

    For those of you who are not sure whether to invest in a TFSA or RRSP please take a look at my simple guide: http://investingincanada.info/2009/11/rrsp-vs-tfsa-which-investment-account-to-use.html

  14. Doby on December 16, 2009 at 9:06 pm

    I have a trading account with BMO and want to transfer stock into a TFSA for my husband and me. I can either add him to my existing trading account or set up a seperate joint account then transfer enough stock to that account to then be transfered into the TFSA’s.

    My questions is by transfering, will I still be able to realize the losses when I file income tax? Would I be better off to add him to my existing account or open seperate joint account.

  15. chad on March 30, 2011 at 9:03 pm

    question if you invest in u.s paying dividened stocks are they tax free also

  16. Konstantin on March 30, 2011 at 9:18 pm

    No, as TFSA is not considered retirement savings vehicle according to the Canada – US treaty.

    15% US withholding tax applies if you fill out W8-BEN (30% without it).

  17. jet on May 29, 2012 at 12:24 am

    IT seams like I always invest oppossite of what the majority is doing & if Iam not it really makes me wonder if I have been thinking or just following.

    Most investors lose money in the well oiled market. Yet most people I talk to are either using their TFSA for high risk investments such as stocks or for a savings account. I feel comfortable using TFSA for purchasing GICs from online manitoba credit unions. The banks are to reckless with the money that is lent to them through deposits. I have heard so many say it is only 5000 dollars that there risking in the market but 5000 dollars really adds up over the years when interest is compounding. Aprox 30 years from now when interest rates peak out the money from TFSA will really start to work. ( there is a 30 yr cycle from high to low to high to low etc in interest rates)

    I will only risk 1-3 % of my capital in the stock market & it will not be in an RRSP or TFSA. which again is a lower percentage then what the majority is investing for those which invest in the market.

    As for RIETS I would only purchase private & again it is the opposite of what the majority is doing which is purchasing puplic. With no more then 3% invested

    For timming the market I have done my own research & use astrology & price pattern for my investing. Few do their own research going back over a hundred years & even fewer do the research to obtain the statistics on the effects of astro physics on market prices.

  18. Goldberg on May 29, 2012 at 2:38 pm

    @jet. Astrology. I love your sense of humor.

  19. Zolf on May 29, 2012 at 2:49 pm

    When I chart a 200 day moving average over a moon chart and multiply by a 4 year average S&P 500 P/E ratio I get a “sell” signal. Can anyone confirm?

  20. Edwin on October 22, 2013 at 6:29 pm

    FrugalTrader, what broker you use for TFSA to trade option spreads?

    Questrade does not allow strategy option trades (vertical spreads, iron condor etc.) in the TFSA account.

    • FrugalTrader on October 23, 2013 at 11:09 am

      @Edwin, I do not trade option spreads, but I hear that Interactive Brokers is good for options however they do not have TFSAs.

  21. satuk on December 18, 2013 at 7:29 pm

    Hi I am thinking of investing in TD eseries index funds in my TFSA account because of the low MER . Any comments on whether this is the right strategy? Thanks

    • FrugalTrader on December 18, 2013 at 8:06 pm

      @Satuk, i’m a fan of the TD e-series (I use it for our RESPs), i say go for it!

  22. satuk on December 18, 2013 at 9:40 pm

    @FrugalTrader: Thanks for the reply. I am also thinking of TD e-series for both my TFSA and RRSP and I am planning to invest in TD e-series index funds – Canadian bond market index, Canadian stock market index , US Stock index and International stock index.

    Is it the right strategy? should I worry about withholding taxes? I read somewhere that for TFSA , I should avoid US index because of withholding taxes. Any input on this? Thanks

  23. FrugalTrader on December 18, 2013 at 9:46 pm
  24. satuk on December 19, 2013 at 4:08 pm

    @FrugalTrader Thanks for the reply. After going through the link, I understand the only difference is no foreign equity funds in TFSA. Is it because of withholding tax? So I can invest in the TD e-series index funds for both RRSP and TFSA except in TFSA I should not invest in US and international index funds. Is my understanding correct? Thanks

  25. FrugalTrader on December 19, 2013 at 4:11 pm

    @satuk, you got it. Basically, if you are going to spread between TFSA and RRSP – put the US/international funds in RRSP and Canadian equity/bonds in TFSA. That should do it!

  26. satuk on December 19, 2013 at 5:00 pm

    Thank you. I think now I am ready with my investment strategy for 2014.

  27. satuk on December 19, 2013 at 5:04 pm

    also I am aiming to do maximum contribution to both RRSP and TFSA so for me it is contributing to both accounts and not a choice between these accounts . I am a passive investor as this is my first year of investing in Canada and not keen to open a brokerage account. Hence I would like to stick with TD e-series for the time being and hope this is the right strategy.

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