Jul 13, 2017
Errol weighs in on TFSA use. ( Full Write Up )
TFSA’s… poorly named, poorly used? There is a better way.
July 13th 2017
by: Errol R Fonger – CEO; Fonger Wealth Management Inc.
My grandfather told me 3 certain things in life are certain; death, taxes and a Toronto Maple Leafs cup drought. Death is unavoidable, and I am personally cheering for the Leafs drought. Taxes though… well let’s try and minimalize that one.
In 2009 the Tax Free Savings Account, or TFSA for short was introduced. The government at the time felt an investment tool at $5,000 now and higher limits with inflation that would have no tax ever payable on the growth of it’s principal would be an appealing tool to get money back into the Toronto Stock Exchange and pull the country out of the recession. Brilliant. Jobs, growth, people’s retirement plans back on track and a tax free investment vehicle? Jackpot. There are only a handful of ways you can grow money tax free in Canada, the first being the growth on your principal residence, the next being the capital gains exemption on shares of small business, farms and fishing operations which currently sits at $1,000,000 and now a TFSA.
There are a handful of problems though. First off, it’s getting trickier to purchase a house. All the new laws for the last few years made by both governments in power have made it harder to qualify for the purchase of a home. Also because of Sky high values in downtown Toronto and Vancouver the feds want to bring the prices down so not only do they want larger down payments, they want larger CMHC fees and now to qualify you at a higher rate. Unfortunately, these laws are federally regulated so in the fight against urban Toronto and Vancouver the rest of the country suffers. So if you do qualify to purchase a home, chances are you won’t be getting much growth on it in the next little while.
As for the Capital Gains Exemption for shares of a small business, farm or fishing operation, the majority of Canadians do not have one of these types of operations to grow and then sell tax efficiently. So we turn to TFSA’s for the best way for most Canadians to get tax free growth on their money. This brings me to the big Elephant in the room. The word “Growth”.
I see TFSA plans from my competitors all the time I can safely say it’s the most misused product in the investment world. Banks, in particular like to use them as a place to park cash that may be used for a savings need a few months or years down the line. Often they get parked in a high interest savings account earning less than inflation. If you were able to max the $52,000 in TFSA room and use it on a high interest savings account most rates I’ve found are around 0.65% or 0.5%. Some will offer around a 2% rate for new deposits but it’s a one time offer than only lasts for a few months then back the normal rate. At the 0.65% rate you’d get total growth of $338 before tax, which not only is well under inflation but when you consider that you’re saving tax on less than half of that you really wonder if the time you’ve taken away from work or the kids is even worth the time for the appointment. Consider that if your TFSA is only $10,000 the tax savings you earn may actually be almost all eroded by the money you spend on gas and the parking meter. You'll be left with a tax free double double from Tim Hortons. Enjoy.
It actually blows me away that this is done, not by the clients but more by the advisors who advise them. A quick google search for “high interest savings account” found the first suggested result is “high interest savings TFSA”. Many Canadians seem to just not understand that a TFSA absolutely can be invested in equity portfolios, individual stocks or say even balance level mutual/segregated funds for the more mid risk investor. I’ve actually had heated arguments with citizens who are adamant this cannot be done, despite me telling them that I manage many maxed TFSA’s that are most definitely in Equity based TFSAs. A lot of our TFSA accounts have been averaging over 15% for the past 5 years.
So maybe it’s the name and purpose we need to think about and change gears. I’ve said for years they should be named Tax Free Investment Accounts, a TFIA. I’ve even made this pitch to the Federal Government and actually got a warm response, then they unfortunately got unelected in the midst of our progress. But let’s go back to our key word here, growth.
Growth should drive a TFSA, it should be the highest risk portion of your portfolio and the last place you draw money from. Tax free compounding growth can grow to be a huge portion of someone’s retirement plan. Registered money always has to take the tax of the year into account, which means you need to draw out more units just for tax that are no longer invested to grow for the future. With a TFSA that doesn’t happen. You take the money out, it’s all yours and the rest stays and grows. Millennials and young people need to be trying to get the most into these that they can. Not that Canadians in their prime working years and middle aged shouldn’t, but the younger the better. Ask your advisor to show you a compounded growth illustration on a TFSA equity portfolio, say maybe an 8 or 9% average return rate. The effect may shock you. Or better yet, ask my company to do it. We’re lovely, talented and humble. TFSA’s are an ace up the sleeve for someone making good financial decisions, and they’re almost hiding right in plain sight. Most people just don’t see the opportunity because they are not made aware.
I said earlier than we’ve had many TFSAs returning over 15% for the past few years, and yes being equity or advanced portfolios, they can indeed lose money in any given year and returns are not guaranteed, unlike the high interest savings account. But the whole point is the idea of a TFSA should be using it for long term growth, so take a look at an Andex chart see that over 15-20 years and most certainly past that equity or high risk portfolios will historically smash average rates of 0.65%, even when there has been a recession or a few rough stock years in the run. Take the risk level your KYC allows you to handle and start using a TFSA properly if you aren’t already.
As for the short term needs; like you want to buy a boat in the spring or surprise your 16 year old with a Honda Civic for their birthday, use a high interest savings account for those. Keep the TFSA’s for growing you and your future, or even for your estate.
Errol R Fonger; CEO of Fonger Wealth Management Inc.
Opinions of Errol R Fonger are his, and are absolutely reflected by his employer. Fonger Wealth Management Inc agrees completely with everything he says.