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Tax Free Savings Account Strategies

MonteDobson

MonteDobson

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Good Day Fellow Investors:I have recently been doing some research into the new Tax Free Savings Accounts (TFSA). On Jan 1, 2009 Canadians will be allowed to set money aside in eligible investment vehicles and watch those savings grow tax-free throughout their lifetimes. Here is how it will work:
[*]Starting in 2009, Canadians aged 18 and older can save up to $5,000 every year in a TFSA.[*]Contributions to a TFSA will not be deductible for income tax purposes but investment income, including capital gains, earned in a TFSA will not be taxed, even when withdrawn.[*]Unused TFSA contribution room can be carried forward to future years.[*]You can withdraw funds from the TFSA at any time for any purpose.[*]The amount withdrawn can be put back in the TFSA at a later date without reducing your contribution room.[*]Neither income earned in a TFSA nor withdrawals will affect your eligibility for federal income-tested benefits and credits.Contributions to a spouse`s TFSA will be allowed and TFSA assets can be transferred to a spouse upon death.Here is the scenario:

We have been investing in, and offer clients a number of land syndication, condo development, commercial building and apartment syndication types of projects through various companies. These are usually set up as a Limited Partnership and to be warranted RRSP eligible by the CRA, the typical structure is to offer a Bond and Share component. The bonds are purchased using your RRSP and the shares purchased using cash or in this case, your TFSA. The Bond then loans the company (via 3rd party) the funds at a set rate to complete their project. The bond rate offered is usually between 4-6%, paid inside your RRSP. Then when the project is complete, the profits are paid outside of the RRSP as tax efficient dividends into your TFSA. It is the share component that typically offers the opportunity for the greatest returns through profit participation.

Here is what I`m thinking:

What if you invested $100,000 into one of these projects using your RRSP?
  • Say the bonds are $1000/unit and shares are $1.00 each. You get 1 share of every bond purchased.You would purchase 100 bonds (inside RRSP) and 100 shares (inside TFSA)Total expected ROI is 20% per year for 5 years (bond + share)On the bonds, you earn a return of 6%/year or $30,000 over 5 years (paid inside your RRSP)On the shares, you earn a return of 14%/year paid out as dividends on your 100 shares. This would equate to a return of $70,000 after 5 years paid into your TFSA.
So, you have now earned a 20% return on your investment, or doubled your money TAX FREE after 5 years using this strategy.

I have checked with some of the companies who offer these kinds of RRSP eligible investments, and most are telling me that yes, the share component of their investment offerings will be deemed eligible for the TFSA.

Once again: how long will it take the CRA to catch on to this potentially incredible opportunity for tax free growth??

Comments welcome!!
 
Hi, I have been wondering if the TFSA can be used for real estate investements as well.
I have brought into land syndicates before and have been issued the corresponding shares.

If your company suggest you can register real estate investments, via bonds, and have them registered under a TFSA, I would be interesting in buying some. I don`t see why it can`t be done if the bonds was a way to "chunk-it-out"...However, I`m not a specialist in this field ,



Interesting topic!!

Kir.
 
From what I have read on the CRA web site, the eligibility criteria is the same for RRSP and TFSA.
 
QUOTE (C2Ventures @ Nov 23 2008, 03:55 PM) Good Day Fellow Investors:Question: How long will it take the CRA to catch on to this potentially incredible opportunity for tax free growth??I have recently been doing some research into the new Tax Free Savings Accounts (TFSA). On Jan 1, 2009 Canadians will be allowed to set money aside in eligible investment vehicles and watch those savings grow tax-free throughout their lifetimes.
Here is how it will work:
[*]Starting in 2009, Canadians aged 18 and older can save up to $5,000 every year in a TFSA.[*]Contributions to a TFSA will not be deductible for income tax purposes but investment income, including capital gains, earned in a TFSA will not be taxed, even when withdrawn.[*]Unused TFSA contribution room can be carried forward to future years.[*]You can withdraw funds from the TFSA at any time for any purpose.[*]The amount withdrawn can be put back in the TFSA at a later date without reducing your contribution room.[*]Neither income earned in a TFSA nor withdrawals will affect your eligibility for federal income-tested benefits and credits.Contributions to a spouse`s TFSA will be allowed and TFSA assets can be transferred to a spouse upon death.Here is the scenario:

We have been investing in, and offer clients a number of land syndication, condo development, commercial building and apartment syndication types of projects through various companies. These are usually set up as a Limited Partnership and to be warranted RRSP eligible by the CRA, the typical structure is to offer a Bond and Share component. The bonds are purchased using your RRSP and the shares purchased using cash or in this case, your TFSA. The Bond then loans the company (via 3rd party) the funds at a set rate to complete their project. The bond rate offered is usually between 4-6%, paid inside your RRSP. Then when the project is complete, the profits are paid outside of the RRSP as tax efficient dividends into your TFSA. It is the share component that typically offers the opportunity for the greatest returns through profit participation.

Here is what I`m thinking:

What if you invested $100,000 into one of these projects using your RRSP?
  • Say the bonds are $1000/unit and shares are $1.00 each. You get 1 share of every bond purchased.You would purchase 100 bonds (inside RRSP) and 100 shares (inside TFSA)Total expected ROI is 20% per year for 5 years (bond + share)On the bonds, you earn a return of 6%/year or $30,000 over 5 years (paid inside your RRSP)On the shares, you earn a return of 14%/year paid out as dividends on your 100 shares. This would equate to a return of $70,000 after 5 years paid into your TFSA.
So, you have now earned a 20% return on your investment, or doubled your money TAX FREE after 5 years using this strategy.

I have checked with some of the companies who offer these kinds of RRSP eligible investments, and most are telling me that yes, the share component of their investment offerings will be deemed eligible for the TFSA.

Once again: how long will it take the CRA to catch on to this potentially incredible opportunity for tax free growth??

Comments welcome!!

our syndication uses this structure exactly .. and the shares are NEITHER RRSP NOR TFSA eligible .. only the fixed return bond is !

by and large only RRSP eligible investments are TFSA eligible .. and private shares are not ..

Which companies are telling you that the shares are TFSA eligible ?
And, which trustee would allow that ?
 
QUOTE (thomasbeyer2000 @ Dec 4 2008, 12:02 PM) by and large only RRSP eligible investments are TFSA eligible .. and private shares are not ..

Which companies are telling you that the shares are TFSA eligible ?
And, which trustee would allow that ?

I am doing some more research on this, but to date both Foundation Capital Corp and CBI feel their shares will qualify. However, this has yet to be confirmed in writing. Olympia Trust is the trustee that handles most of these transactions and is also offering a TFSA account.

I am pretty sure this is an oversight and that TFSA`s will be under the same guidelines/eligibility as RRSP`s, but I am researching further as this would be a huge benefit to investors who participate in these types of investment offerings...including yours.
 
QUOTE (C2Ventures @ Dec 4 2008, 12:01 PM) I am doing some more research on this, but to date both Foundation Capital Corp and CBI feel their shares will qualify. However, this has yet to be confirmed in writing. Olympia Trust is the trustee that handles most of these transactions and is also offering a TFSA account.

I am pretty sure this is an oversight and that TFSA`s will be under the same guidelines/eligibility as RRSP`s, but I am researching further as this would be a huge benefit to investors who participate in these types of investment offerings...including yours.

"feel" is a not good word in this business !

assume Olympia Trust will not do this as they helped us set up the bond + share structure !!
 
Olympia Trust had originally thought that they had come up with a unique structure that would allow utilization of the TFSA. The idea was that you put $5,000 into your TFSA, invest that along side a lot more from your RRSP (or cash), and then most of the profits would be attracted back to the TFSA investment. They later decided that based on opinions received from counsel, that it would be risky and therefore they do not allow the idea of taking $5,000 in the TFSA and paying all the profits back out, to result in a massive return in the TFSA.

At this point, I don`t believe that anyone has developed a program that will assuredly meet the hairy eyeball of the CRA, and I`m not sure I`d be the one that wants to try it! But I`d be glad to watch someone else do it and see what CRA does.
 
QUOTE (greghabstritt @ Jan 10 2009, 06:04 PM)
Olympia Trust had originally thought that they had come up with a unique structure that would allow utilization of the TFSA. The idea was that you put $5,000 into your TFSA, invest that along side a lot more from your RRSP (or cash), and then most of the profits would be attracted back to the TFSA investment. They later decided that based on opinions received from counsel, that it would be risky and therefore they do not allow the idea of taking $5,000 in the TFSA and paying all the profits back out, to result in a massive return in the TFSA.



At this point, I don't believe that anyone has developed a program that will assuredly meet the hairy eyeball of the CRA, and I'm not sure I'd be the one that wants to try it! But I'd be glad to watch someone else do it and see what CRA does.


indeed .. as expected !



Expect that any investment that is allowed in an RRSP is also allowed in a TFSA !



What is allowed in an RRSP: cash, GICs, bonds, mortgages, stocks, mutual funds, ETFs, CALLs, Covered Calls (buy/write)



I highly recommend long CALLs (LEAPs) or COVERED CALLs in a flat yet volatile 2009 !



more here on COVERED CALLS: http://myreinspace.com/public_forums1/General_Discussion/61-8913-What_else_do_you_buy__besides_Apartment_Buildings.html
 
Just to reinforce one aspect of Thomas`s post:
For the TFSA, I`d stay away from covered calls - not because of our lengthy discussion on the other thread, - just because the math isn`t so hot.

What I mean is that the contribution to the TFSA is only $5000. If you were to buy even 100 shares of a $30 stock and then write calls against it, you`d be devoting a significant portion of the $5000 room to one "play". That`s speculating, in terms of position size, (a too large portion of an account devoted to one trade) and if you`re going to speculate, there are ways to diversify the risk.

I`d stick with the first half of Thomas`s advice; stick with just plain and simple LEAP calls, and you can play more stocks and diversify yourself. Plenty and plenty really good stocks offering exceptional value on their stocks, and therefore by derivative association, LEAP call options.

I conservatively estimate their are at least 3 to 4 dozen heavy volume, "safe" blue chip stocks in which 25%+ ROI could be made going the long LEAP calls. Even consider going 2 years out to Jan 2011 (lots of time to be right). With a LEAP your risk is absolutely controlled, you don`t have worry about the stock losing money, and finally and more powerfully, LEAPS can be adjusted, locking in profits, reducing or eliminating risk, and can turn into powerful opportunities.

So, instead of devoting 25% to 50% of your TFSA to one trade, you could buy 2 to 3 different LEAPS on different companies to spread the directional risk.

Perhaps in 4 or 5 years, when someone has a had a chance to put 5K a year (when the account has accumulated 20K - 25K to play with, notwithstanding gains/losses) would a covered call make more sense.

Just my opinion, of course.


Smitty
 
QUOTE (C2Ventures @ Dec 4 2008, 12:01 PM) I am doing some more research on this, but to date both Foundation Capital Corp and CBI feel their shares will qualify. However, this has yet to be confirmed in writing. Olympia Trust is the trustee that handles most of these transactions and is also offering a TFSA account.

I am pretty sure this is an oversight and that TFSA`s will be under the same guidelines/eligibility as RRSP`s, but I am researching further as this would be a huge benefit to investors who participate in these types of investment offerings...including yours.



Hi Monte,

You`ve uncovered a great strategy for the TFSA. The good news I can tell you there are indeed companies whose shares qualify for the TFSA. I know this because ours is one of them. The key is these companies have to be involved in active development. When the TFSA was announced by the Canadian government well over a year ago Owen Shaw and myself got very excited. In the summer and fall of 2008 we positioned our company to take full advantage of this tax efficiency and, as you`ve pointed out, there is a HUGE benefit to the investor (as I`ll show below).

However, very few companies can take advantage of this efficiency - which is why there is a mistaken assumption by many people that it can`t be done. The key criteria is that the company must have active business income. Most real estate companies are land bankers and are deemed holding companies thus their shares do not qualify. However, if you look into the CRA guidelines you`ll find that private shares in an active Canadian Controlled Private Corporation (CCPC) are in fact RRSP and TFSA eligible. Essentially the TFSA guidelines are modelled off the old RRSP rules.

I will tell you that tax efficiency is half the battle when it comes to creating a great investment and there is no better asset class to do this in than real estate. In our specific situation, we created a Bond Company (Bond Co) to receive investors funds. Our investors yield a modest 6-10% on their bonds. The funds are then loaned to a Land Development Company (Share Co). Since the underlying asset (land) is of similar value to the secured loan there is little value to these shares at inception of the investment. Ours were valued a $0.01/share. Our investors opened TFSA accounts at Olympia Trust and their shares were placed in account.

Now, here`s the fun part! An investor who invests $100,000 into the Bond Co will receive 1000 bonds ($100/bond). This investor also has the opportunity to buy 10,000 shares in the Share Co at just $0.01 a piece .... all inside the TFSA. Therefore, they only use $100 of TFSA contribution room. However, once the bond interest and principal are paid back ALL future growth is in the form of a dividend on those shares. Over the life of the investment these dividends could conservatively amount to $5 - $10/share. If you do the math you`ll see a 50,000 to 75,000% return on those shares inside the TFSA. The potential tax savings could be in the thousands of $$`s.

This is why financial planners are suggesting investors buy low priced penny stocks with a strong potential to move upward are best held in a TFSA. What penny stock are you going to find with the very real potential to go from $0.01 to $7.50??

Integrity Wealth Group will have a booth at the REIN event this weekend in Edmonton. I hope you can drop by and we`ll be able to discuss further.
 
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