Ottawa Investment Advisor John Bruce

The new TFSA. Think investing, not saving.

January 9, 2009 · Print This Article

The tax free savings account (TFSA) – it’s about time we got this! I just wish it had been named more appropriately as in the TFIA- The tax free investment account.

Let me explain.

I believe that the TFSA is long overdue, but better late then never it is time for all Canadians to take advantage of this wealth building opportunity. I have been looking at different materials that have been put out by the banks and financial institutions and it seems that no one has hit the target as well as they could. Everything that I see emphasis’s,”tax free interest” and “tax free investment income”. I have yet to see anything other then the official word from CRA that capital gains are included.

I had delayed presenting anything but generalities to my clients regarding the proposed tax free savings account until it became law. With the pre Christmas brouhaha between the NDP/Liberal/Bloc, nothing was as it seems and I was concerned that if the coalition was successful, the TFSA would likely be axed by the Liberal “Tax and Spend”, the Blocs “Quebec First” and the NDP’s “Socialistic Policies” that would frighten foreign investment right out of Canada.

Here are some points to ponder.

  • When you see or hear the words ‘Saving Account” What comes to mind? The bank or credit union of course! Where else do you keep a savings account?
  • What is the number one profit centre to the big banks? Cash in savings accounts. They pay the least interest and allow the bank to lend your money at a far higher rate then you will get.
  • What is the number two profit centre to the big banks? GIC’s (Guaranteed Investment Certificates). Problem is that if you want a higher rate you have to lock in your money for years.
  • What is the current inflation rate? The federal government tries to keep it at no more then 2%.
  • As of Jan 8, 2009 the average savings account paid 2.25% and if you locked in to a minimum $5000 GIC for 5 years, you could get 4.37%.

So what is the average Canadian doing with the TFSA? I asked around.and many do not know it exists. Those that do, have gone to their banks and opened a Savings account or GIC account. So after you factor in the lower range of the inflation rate, your Real Rate of Return is .25% on a savings account and 2. 12% on a GIC locked in for 5 years. (Better hope inflation goes down if you take the GIC route or your money will erode over the locked in period.)

If you are pulling your hair out in frustration, I don’t blame you. There is something you can do that is a way to utilize the tax free savings account effectively that in my opinion could lead us all to the Millionaire’s Club down the road with a bit of calculated risk and understanding of the value of capital gains and Dividend income, and Dividend Reinvestment. The longer you have to invest the maximum $5000 per year the better your long term performance may be with compounding.

Call me to discuss my two approaches to maximizing possibilities with the TFSA.

John S. Bruce

Investment Advisor

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