Canadians Have Their Own Tax Haven

We heard it all the time:

“Millionaires and corporations are opening secret bank accounts in tax haven jurisdictions in order not to pay taxes.”

The only reason why wealthy people and corporation take such a big risk is because they don’t like to pay taxes.

Many of us are quick to point fingers and we said “how come they can protect their income from taxes and we can not?”

The reality is that the Canadian Government allows to create investments accounts which are 100% tax free. These investments accounts are called Tax Free Savings Accounts (TFSA).

As the name implies, the money gained in those accounts is tax free.

What kind of investments you can have in a TFSA?

You can have:

  • Stocks
  • Bonds
  • ETFs
  • Mutual Funds
  • Index Funds, etc

In 2009, the Canadian Government came to the conclusion that Canadians were not saving enough for retirement and in an effort to incentivise Canadians to save more, they created the Tax Free Savings Account.

What’s the catch?

The catch is that the amount of money you can put in those accounts is limited, this way, this awesome opportunity is accessible to low and mid income families but not so much to high income families.

What are the limits?

  1. The limits are established every year by the Canadian Government. One thing to keep in mind is that if in one year you don’t use your whole limit, you can top it off the following year.
  2. You must be 18 years or older

Another great advantage if the TFSA is that you withdraw your money at any time without penalty, no explanations necessary. If you withdraw you money, you can always put it back in the following year.

These are the limits

Year Contribution Cumulative
2009 $5,000 $5,000
2010 $5,000 $10,000
2011 $5,000 $15,000
2012 $5,000 $20,000
2013 $5,500 $25,500
2014 $5,500 $31,000
2015 $10,000 $41,000
2016 $5,500 $46,500
2017 $5,500 $52,000
2018 $5,500 $57,500

The sad reality

The sad reality is that only 20% of Canadians take advantage of this wonderful opportunity. We rather complain about the people who are protecting their money from taxes that protecting our own money.

The major reason for not taking advantage of this opportunity are:

  1. Not knowing or understanding that these opportunities are available, in spite of the great extent that the government and the financial institutions go to disseminate the information.
  2. Not having enough money to save.

Who is taking advantage of the TFSA

The people who like the TFSA the most are millenials and people with in tax brackets. Me too, I deposit the maximum allowed each year.

Some strategies to implement

If you have other investments, the best thing is to put the investments which are more highly taxed inside of the TFSA and other investments which are taxed at a lower rate outside the TFSA.

Things to watch out

Although the gains in the TFSA are tax free, if the government suspects that you are daytrading, they could change their mind and tax you as regular day-trading income. The government hasn’t publish their definition of daytrading, but already some people have been penalized for excessive trading in their TFSA

For our USA readers

The TFSA is in fact similar to the Roth IRA account, except that in Canada we have more flexibility. We can withdraw the capital invested plus its gains at any time without any penalty.

About the Author

Alain Guillot is a Money Coach in Montreal Canada. He helps people with their budgets and with their mindset. He has helped many Canadians to get out of debt or to get out investment with high management fees.

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