TFSA gambit

Preparing for life after work. RRSPs, RRIFs, TFSAs, annuities and meeting future financial and psychological needs.
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kiwidog
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TFSA gambit

Post by kiwidog »

Lets assume you have a TFSA for yourself and your wife that has had the good fortune to accumulate $100k each. You need income, Having some of it tax free would be nice or having some at lower rate due to capital gains tax would be nice.
The TFSA has a position in couple of stocks which has done well and pay dividends so the $100K pays about 4% in dividends, so $4000 annually in cash flow in the TFSA's
So in December of each year you take the $4000 each out of the TFSA's so you have $8000 of tax free income to add to your other taxed income to make your needed nut for your annual lifestyle costs.
Come January of next year you contribute your new contributions of $5500 each in kind plus your recently withdrawn $4000 as a re-contribution for a total contribution in-kind of $9500
The in-kind contribution is say a Canadian bank stock which has cost base 50% lower then the current price so you have taxable gain on half of the $4000 each re-contribution because of the cost base and you also only pay tax on half the gain because of the capital gains inclusion rate The tax payable would be on $1000 of the $4000 re-contribution and $1375 of the regular $5500 contribution,
All in the tax would need to be paid on $2375 for each spouse so say at tax rate of 35%, the tax would be about $832 each.

If the TFSA is not capped or changed you may eventually have most of you taxable account positions contributed to the TFSA's. If you live long enough :D

Any holes in the argument? Changes to make it better or can it altogether?
Comments and critique's welcome,

Thanks jb
ig17
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Re: TFSA gambit

Post by ig17 »

What's the point of withdrawing and re-contributing $4000? You can sell $4000 worth of stock in the taxable account, pay tax and spend the proceeds.
gaspr
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Re: TFSA gambit

Post by gaspr »

Maybe a dumb question, but why do you say that the "tax payable would be on $1000 of the $4000 re-contribution"?? There was no tax due when you withdrew this money, and none when you re-contribute... What am I missing here?
ig17
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Re: TFSA gambit

Post by ig17 »

$4000 re-contribution is in-kind. It triggers a deemed disposition and a capital gains tax.

What is the benefit of this maneuver? You can simply sell the stock, pay the same tax, and spend the rest. Why bother to withdraw and re-contribute?

I must be missing something obvious, or maybe not.
DenisD
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Re: TFSA gambit

Post by DenisD »

Maybe let's you transfer an extra $4000 worth of stock ($9500 total) into your TFSA each year without having to sell and repurchase?
ig17
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Re: TFSA gambit

Post by ig17 »

DenisD wrote: 11 Jan 2018 23:44 Maybe let's you transfer an extra $4000 worth of stock ($9500 total) into your TFSA each year without having to sell and repurchase?
$4000 comes from the dividends inside TFSA. You can reinvest them for free via DRIPs.
Eclectic12
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Re: TFSA gambit

Post by Eclectic12 »

ig17 wrote: 11 Jan 2018 23:50
DenisD wrote: 11 Jan 2018 23:44 Maybe let's you transfer an extra $4000 worth of stock ($9500 total) into your TFSA each year without having to sell and repurchase?
$4000 comes from the dividends inside TFSA. You can reinvest them for free via DRIPs.
AFAICT ... the overall aim is to get as much taxable stock moved into the TFSA to hopefully keep growing/paying income tax free.
Choosing to pay expenses from the existing TFSA income adds the previous year withdrawal to the total amount that can be transferred to the TFSA.

Sure the $4k TFSA withdrawal could be re-invested as a DRIP ... but then that income would have to come from another source like selling the taxable stock.

The other potential advantage, assuming the stock is managed so it doesn't tank with no potential benefit (i.e. can't claim a capital loss) is that over a series of years, small chunks of CG are paid to never be charged again. Should one spouse die say ten years down the road - the draining of the taxable account will mean a smaller, lump sum tax bill to drive up the tax rates.

I say potential advantage because this strategy assumes continued growth. :mrgreen:
If a crash like 2009 happens at the wrong time, one may rue having decided to pay a higher deemed disposition CG than doing something similar at a much lower share price.

It seems similar to gifting excess cash that has already had the income tax paid on it to sons/daughters/nieces/nephews/friends to avoid the estate paying a bigger tax bill at death.


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Pickles
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Re: TFSA gambit

Post by Pickles »

I see no advantage at all to paying any capital gains before you have to, unless -- for some reason -- you wish to sell the stock or your tax rate in a particular year will be lower than usual because your income took a temporary dip. However this is not the situation you are describing at all.

Dripping within the TFSA is clearly a preferable means of growing your TFSA; no muss, no fuss, no tax on dividends. And if extra income to spend is your goal, take out the dividends and spend. Your scenario takes out $4000 in December because you want/need income then, you $4,000 to pay back a month later plus you contributing for that calendar year. Obviously, you didn't really need that $4000 for a month (that's what credit cards are for).

Let that money stay in the TFSA and contribute your annual max, currently $5,500, whenever you have money to spare. For example, if one of your stocks in your non-registered account goes belly up and you sell it, you might contribute the proceeds your TFSA.

Moving money back and and forth frequently is a red flag for bored CRA reps and doesn't provide any benefit for your trouble. I wouldn't recommend this approach to anyone.
Regards,
Pickles
Eclectic12
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Re: TFSA gambit

Post by Eclectic12 »

Pickles wrote: 22 Feb 2018 12:26 I see no advantage at all to paying any capital gains before you have to, unless -- for some reason -- you wish to sell the stock or your tax rate in a particular year will be lower than usual because your income took a temporary dip. However this is not the situation you are describing at all ...
I am describing the rationale I can see for the OP's plan.

It is risky as it assumes that paying the CG now is a good thing as the stock will keep growing free of taxes while increasing the TFSA income to live on. I also suspect it will be hard to be right all the time about what stocks will keep growing, without making a mistake or being too busy to react if the situation changes. The more attempts made, the more to track/monitor/react to.

If we ignore the OPs plan to look at when it makes sense to make the in-kind transfer to the TFSA, triggering CG - I wonder what the advantage is for when one already plans to sell the stock. Maybe it is my bias ... but when I sell, it is either to pay for something (ex. new roof, payoff mortgage) or because the stock is going south (ex. Nortel). In neither of these situations would there be an in-kind transfer to the TFSA.

A temporary low income is good for the transfer as it would have lower taxes.

I would add temporarily low share price as well as it lowers the CG. Making the in-kind transfer in Mar 2009 when I was short of cash meant an $80 CG to report instead of the high of $1500 CG from several months before and several months after. Dividends stayed the same so it was a nice gain for me.

Pickles wrote: 22 Feb 2018 12:26 ... Dripping within the TFSA is clearly a preferable means of growing your TFSA; no muss, no fuss, no tax on dividends. And if extra income to spend is your goal, take out the dividends and spend. Your scenario ...
Not sure why you are talking about "my scenario" when kiwidog wrote the question. There seemed to be confusion as to what kiwidog's aim was.

While Dripping is good (assuming one still likes the business prospects, management actions), with two TFSAs x $100K, growing the TFSA does not seem to be the aim. AFAICT his top goal is to get the taxable investments into the TFSA as seen by the " ... you may eventually have most of you taxable account positions contributed to the TFSA's" statement.

Pickles wrote: 22 Feb 2018 12:26 ... Let that money stay in the TFSA and contribute your annual max, currently $5,500, whenever you have money to spare ...
I can only guess but I suspect the objection is that using only the annual allotment slows down the taxable stock being converted to Canadian tax free stock.

Pickles wrote: 22 Feb 2018 12:26 ... Moving money back and and forth frequently is a red flag for bored CRA reps and doesn't provide any benefit for your trouble. I wouldn't recommend this approach to anyone.
??? ... one cash withdrawal at the end of the year and a couple of stocks being contributed in-kind the following year is a lot of movement?
Makes me wonder why the bored CRA reps haven't got around to me yet. :mrgreen:

The concern seems overblown as the situation described sounds more like a typical retiree situation.

Last I read of people with TFSA problems, they were doing a lot of stock trading to make huge amounts in a short period of time and had connections with the financial industry. Kiwidog can confirm but what is written sounds like not a lot of trading is happening in the TFSA.


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