Well another calendar year has almost passed,but IMO the next two weeks can set up much of 2011's gains and tax sheltering startegies...via taxloss buying and, (selling if necessary), also planning how we may use unused and new space within our TFSA account.
Below I discuss the basics/practical information,from my perspective,but within the framework of the TFSA rules. The rules,limitations, and some options available to me and my present trading strategies are set out in examples below...IMO there is no black and white strategy,more so options for each of us as individuals and how we can maximize the TFSA as a "trading vehicle". My example below will focus on the TFSA as a equity/stock trading vehicle.
Please contact your own council,tax accountant, and or relivant guidance to better suit "YOUR CIRCUMSTANCES"...please do your DD to see how the rules apply to You...Thank You.
Go Big or Go Home vs. Conservative sheltering...or a combination of the two Strategies?
The basic rules of the TSFA allow any Canadian resident 18 years of age with a S.I.N. to contribute $5,000/yr. starting January 2,2009...as of today we could essentially contribute $5,000 for 2009 and $5,000 for 2010 for a total of $10,000 in Canadian dollars. On January 1, 2011 we will have another $5000 worth of space available to us...
Plan A: Go Big or Go Home
I will take all $10,000 worth of buying power and hold multiple bagger possibility equities within my TFSA account. The premise of this strategy is to increase the size of the TFSA very early on in the cycle of its existence...WHY you ask?
March 17th,2010 I fund my TFSA, and then buy a micro-cap stock 10,000 shares @ $1.00/share or our maximum of $10,000. The stock does well, I sell those shares at an average of $5.00/share on July 14,2010 for a total value in my TFSA of $50,000.
At this point I can redeploy that $50,000 within that TFSA into many equities,perhaps now more conservative equities, or other holdings that qualify within the rules set out by the CRA. Or I can withdraw some or all those funds upon the settlement date of my trade, "tax-free"...with the key here being that, "early on" I have now created a "Monster Trading Vehicle" that I can use down the road.
So let's say I have withdrawn all $50,000 of my TFSA on August 15,2010,(my balance in my TFSA at this point is zero) and I go buy a big Bass Boat, just because...I go fishing for a few months,then fall arrives,fishing season is done...time to get back to making some money,the date is now October 15,2010.
The TFSA' rules state I have created a personal space of $50,000 for future use within my TFSA, the catch is that I must wait until the following year to put that $50,000 back to work in my TFSA...so January 1,2011 rolls around I can now put $50,000 back into my TFSA,plus the $5,000 of new space available to me as a new contribution for that year, 2011...$55,000 of TFSA funds, and everything I there again can add to that amount in capital appreciation,dividends,etc. all grows "tax free", and I can once again at anytime withdraw some or all those funds "tax free",but I also can return those funds the following year as now hopefully a bigger pool to repeat the steps above.
So in summary,the above example takes a "very aggressive strategy" to build up a very large pool within the TFSA early on in the cycle of the Canadian TFSA. My personal feeling is that if I can build a large enough TFSA pool up early, then I can fore go the need of a cash account and paying taxes on those gains....and also possibly eliminating the need of having to hide cash in a SDRRSP that eventually gets taxed upon the withdrawal of funds too...the goal is to build a "Monster(tax-free)Trading Vehicle" and pay no taxes,every traders' dream. The TFSA should be looked at IMO as a portion of our own overall individual trading and investments,ie Real Estate/Savings accts./RRSP/Pension funds/Insurance policies/Hard assets PMs/Collectibles/Bonds/RIFs/etc.,but I think if given the space in a balanced strategy it can be leveraged up to increase its importance and use.
JimmyNMI, Thank you for pointing out a huge difference in funding a Self Directed TFSA vs. funding a SDRRSP...in rolling in a loss position holding into a TFSA,the loss can NOT be claimed, see the guidelines in my comment below as set out by the CRA.
Types of investments allowed in a TFSA
Generally, the types of investments that will be permitted in a TFSA are the same as those permitted in a registered retirement savings plan (RRSP). This would include mutual funds, securities listed on a designated stock exchange, Guaranteed Investment Certificates (GICs), bonds, and certain shares of small business corporations.
You can also make "in kind" contributions to your TFSA, as long as the property is a qualified investment. You will be considered to have disposed of the property at its fair market value (FMV) at the time of the contribution. If the FMV is more than the cost of the property, you will have to report the capital gain on your income tax return. However, if the cost is more than the FMV, the resulting capital loss cannot be claimed. The amount of the contribution will be equal to the FMV of the property.
The downside of a "very aggressive strategy" of course is that a risky stock(s) could blow up and not perform. But what have I lost if my stock(s) blows up? Perhaps only compounding time, and some space within my TFSA would be lost,latter years give me the opportunity to add more funds...we each have to trade within our own means,ability, and risk tolerance within the vehicle of the TFSA! Also within a TFSA,losses can NOT be written off against your taxes,there again trade within your risk tolerance.
Plan B:Conservative sheltering
This plan relies on perhaps a dividend stock,GIC,interest earnings account,etc....and like the old story of the tortoise and the hare, the tortoise may win the race also. Below is a Financial Post article with some tame ideas, and the banks and such seem to push the tame approach as they lend your cash out in the form of loans. The downside to this "conservative method" is that it may take much longer to build a decent size nest egg.
Whatever the method, and intended need,perhaps you just require a few thousand for university, a bathroom reno, please atleast take the time to educate yourself to the advantages and disadvantages of what I think is a very unique vehicle for Canadian investors/savers.
As I say feel free to post some different strategies that fit perhaps an aggressive stance or conservative/tortoise like approach,the goal is that we all reach "our intended line" whatever method we choose to get there.
Perhaps down the road if my "very aggressive approach" works I will further explore how to then generate an income,monthly or annually using other investments, until then, I swing for the fence, and keep racking up the bags in my quest to Xploit the TFSA...play ball!
Please as always do your DD on any of my suggestions or those of our fellow SH friends.