# Strategy to gradually move non-registered dividend income into a TFSA



## janus10 (Nov 7, 2013)

From Gordon Pape's "Retirement's Harsh New Realities" he includes an excerpt of a TFSA strategy from a reader. 

I think it would work nicer if one's TFSA grew in absolute terms as much as the income from one's non-registered portfolio. The numbers in this example look painfully small (and, since I've never withdrawn money from a TFSA, I don't know if there are any admin fees).

_"We are using a different strategy to (partially) address the problem of grossed-up dividends artificially inflating income such that OAS is clawed back.

We are in our early sixties, retired, and both receive CPP, OAS, and some pension income. We use our unregistered assets to produce additional dividend and interest income. We each have a TFSA account and started depositing $5,000 respectively in early 2009. Assume that each TFSA account earned $250 (5%) of income in 2009. Here's what happened.

1. In December 2009, $250 was withdrawn from each TFSA and was not included in 2009 taxable income. Similarly, the $250 withdrawal was not counted as income towards the 2009 OAS claw back.

2. Because $250 was withdrawn in 2009, the January 2010 contribution room increased to $5,250. We each made a $5,250 contribution in January 2010; there is now $10,250 in each account.

3. Assume that each TFSA continued to earn 5%, i.e. $513, in 2010. That $513 was withdrawn tax-free in December 2010, with the consequence that contribution room in January 2011 is increased to $5,513.

This pattern continues each year. Gradually, we shift taxable income from unregistered investments into the TFSA. If we continue this process of contribution and withdrawal (and the 5% assumption holds) we could be receiving nearly $6,300 of tax-free annual income ($3,144 each) within a decade. Not huge, but not to be ignored, and none of it affects our clawback limits. If we had been able to start this process when we were in our fifties our tax-free retirement income would have been much more significant. 

Accordingly, we are loading our TFSAs with blue-chip dividend producing shares which hopefully will also generate non-taxable capital gains. When one of us dies, the surviving spouse (we are our respective sole beneficiaries) continues to receive the combined tax-free income from both TFSAs for as long as they survive, again without affecting the claw back. – David C.,
Kingston ON

Response: This is an excellent strategy and one that had not occurred to me. However, it is important to remember that it only works effectively if it used to move money from a taxable investment account into a TFSA. This is just one more example of the flexibility offered by TFSAs and how they can be used to achieve a variety of goals. – G.P."_


----------



## Woz (Sep 5, 2013)

I don’t quite follow the benefit in withdrawing and then recontributing the dividends. You’d have the exact same amount in your TFSA if you just left the dividends in your TFSA and let them compound.


----------



## bgc_fan (Apr 5, 2009)

Woz said:


> I don’t quite follow the benefit in withdrawing and then recontributing the dividends. You’d have the exact same amount in your TFSA if you just left the dividends in your TFSA and let them compound.


Shh, don't burst their bubble. For some reason people think that by withdrawing one year and increasing their contribution room the next year, they're beating the system...

But, in this case, that might be somewhat true in a convoluted way of thinking. What they're doing is transferring funds from the taxable account into the TFSA and living off the TFSA withdrawals which increase the amount they can transfer in the next year. Of course, I think that just depleting your taxable account and not touching the TFSA would end up doing the same thing.


----------



## andrewf (Mar 1, 2010)

Evidence that Gordon Pape is an idiot, if you still needed any. I thought he was still selling the Canadian Cardboard Box Plan...


----------



## janus10 (Nov 7, 2013)

bgc_fan said:


> Shh, don't burst their bubble. For some reason people think that by withdrawing one year and increasing their contribution room the next year, they're beating the system...
> 
> But, in this case, that might be somewhat true in a convoluted way of thinking. What they're doing is transferring funds from the taxable account into the TFSA and living off the TFSA withdrawals which increase the amount they can transfer in the next year. Of course, I think that just depleting your taxable account and not touching the TFSA would end up doing the same thing.


Initially I had the same reaction as Woz. In fact, even when I was typing the original post I had prefaced it with a call to explain how this helps. But, before I sent I finally recognized the benefit. This method accelerates the transition to shelter non registered assets.

Of course they could go on their merry way and simply add $5,500 per year (assuming the $10k 2015 limit is gone next year) but by actually withdrawing their growth from the TFSA each year they increase the rate they can shelter their non reg while simultaneously reducing the grossed up impact to income tested government benefits.

By the time this becomes a personal issue, I would anticipate our TFSA balances would be producing income larger than the contribution limits and far larger than dividend income from our non reg portfolio. 

I could create a framework to run scenarios through to show the efficacy of this strategy but I'm not anticipating this would be anything that will be of concern to me. And I'm just not that bored.

Maybe Steve41 has something in his software that can provide some data points.


----------



## andrewf (Mar 1, 2010)

Janus, you're mistaken. Withdrawing income from TFSA and recontributing is completely pointless vs. leaving the cash invested within the TFSA.

Say you had $5000 invested, earned a 5% return in the first year. 

Scen 1, withdrawing income

Before end of year 1, withdraw 250, and at the beginning of year 2 recontribute $250 and the $5000 contribution limit.

After all the transactions you will have $5000 +250 (income)-250 (withdrawl) +250 recontribution +5000 contribution of next year's limit, totalling 10,250. As you can see, the contribution and withdrawl cancel out, and the balance is $10,250 after contributions in year 2.

Scen 2, leave returns in TFSA

$5000 (initial balance) +250 (income) + $5000 (year 2 contribution limit) = $10,250.

Exact same ending balance.


----------



## Rysto (Nov 22, 2010)

I wonder if the point is to contribute existing holdings in-kind? You could avoid trading commissions by withdrawing cash and contributing shares that you already own. Early on (as in the $250 example), the savings even on $10 commissions would be relevant next to the amount we're talking about here.


----------



## Eclectic12 (Oct 20, 2010)

janus10 said:


> Initially I had the same reaction as Woz. In fact, even when I was typing the original post I had prefaced it with a call to explain how this helps.
> But, before I sent I finally recognized the benefit. This method accelerates the transition to shelter non registered assets.
> 
> Of course they could go on their merry way and simply add $5,500 per year (assuming the $10k 2015 limit is gone next year) but by actually withdrawing their growth from the TFSA each year they increase the rate they can shelter their non reg while simultaneously reducing the grossed up impact to income tested government benefits.


The writeup says they are using dividend income to do this ... so they are subject to the gross-up and income tax for what is paid as dividend income. If they started with $10K of dividend income with gross-up and say an OAS clawback of $1K - they will be in the same situation a decade later (assuming no changes to clawback specs etc.).

The limited part I see that is going to be sheltered (i.e. free from the gross-up, OAS clawback and DTC) is the after-tax income that is contributed to the TFSA then used to buy a dividend paying investment.


Everyone has their own situation but I suspect transferring the dividend paying investments at a low point to the TFSA with an "in-kind" transfer and using fresh money to buy investments that pay only capital gains when sold in the taxable account would be a far more effective strategy. This way, year by year - the taxable income may be dropping, less of the income is subject to the gross-up and increases in the taxable account/income are worst case, happening at the best rate that will affect OAS clawback the least (i.e. capital gains).

As long as they stick to using dividend income as described, the best they can do is hold the income grossed-up flat or growing slowly.




janus10 said:


> By the time this becomes a personal issue, I would anticipate our TFSA balances would be producing income larger than the contribution limits and far larger than dividend income from our non reg portfolio.


Fill your boots ... but should I come close to the OAS clawback, I vastly prefer to reduce my dividend income versus keeping paying year after year after year as it is paid, where the gross-up as well as any clawback consequence stays in place. The strategy as described seems a lot of effort with a limited benefit.

Keep in mind that what one does with the withdrawn amounts matters as it can also generate income, pushing one closer to the clawback.


Cheers

*PS*

To use an analogy ....

boy ... "Look Ma, by switching from a thimble to a sand pail, to a basin, to a bucket - the flow from the tap is being contained."

Ma ... "Shouldn't the tap be turned off?"


----------



## humble_pie (Jun 7, 2009)

i'm puzzled too, i don't see any advantage save & except for one tiny nano-category of investors.

these would be the well-off seniors who started their TFSAs years ago with interest-bearing paper of some kind, then came to realize - as the accounts grew larger with succeeding contributions over the years - that what should really go into TFSAs are the high dividend paying stocks.

the reason for this is to shelter & protect OAS payments from being clawed back by high taxable investment income, particularly dividend income.

perhaps the OP then commenced a lengthy process of withdrawing some interest-bearing paper from TFSA each year & replacing it early the following year with a contribution-in-kind of dividend paying stock?

that might make sense. But the problem - too much interest-bearing paper in TFSA, too many dividend-paying stocks in non-registered account - can be cured in other ways that are far less complicated.

such as buying the dividend stocks in TFSA in the first place.


----------



## Eclectic12 (Oct 20, 2010)

andrewf said:


> Janus, you're mistaken.
> Withdrawing income from TFSA and recontributing is completely pointless vs. leaving the cash invested within the TFSA.


+1 ... 

Where it would make sense is if one's TFSA contribution room was just short of being able to complete an "in-kind" transfer of the dividend paying stock to the TFSA. Then the withdrawn income in say Dec could enable the entire block of stock to be transferred to the TFSA instead of having to break up the block.





humble_pie said:


> i'm puzzled too, i don't see any advantage save & except for one tiny nano-category of investors ...
> the reason for this is to shelter & protect OAS payments from being clawed back by high taxable investment income, particularly dividend income ...


The high phantom income that the gross up creates seems to be a concern ... the puzzle is why the writeup refers to using the income with no mention of re-allocating the dividend payers to the TFSA. Without doing something to reduce the dividends paid - by definition, the gross-up and any clawback it generates will remain in place.

Converting the dividends to capital gains and/or "in-kind" transfers of the dividend payers to the TFSA seems like a more effective route as it will reduce the income reported that is grossed-up.


Cheers


----------



## naysmitj (Sep 16, 2014)

Are you people not subject to an admin fee of some sort to withdraw from your TFSA? If not, where do you have it set up?


----------



## Eclectic12 (Oct 20, 2010)

It seems be vary by type of account ... I haven't heard of fees for withdrawing/limits to the number of free withdrawals from a cash TFSA such as President's Choice or Tangerine.

The last survey I saw, it seemed that most brokerage TFSA accounts that provided the full range of investments (i.e. stocks, bonds, GICs, MFs etc.) provided one free withdrawal per year. I notice that RBC Direct Investing's fee schedule lists $0 so with the way the big bank brokerages tend to match each other, it would not surprise me if the limit on free withdrawals has been lifted.


Note that there can be a transfer fee ranging from $45 to $150 for transferring to another financial institution, which is not the same as a withdrawal.

To avoid this fee, some will choose to move their TFSA money around by withdrawing from the source TFSA account in late Dec (no fee withdrawal) then in Jan the next year when the withdrawal has become TFSA contribution room, deposit to the target TFSA account.


One needs to check the rules for one's particular TFSA(s) to be sure.


Cheers


----------



## steve41 (Apr 18, 2009)

janus10 said:


> Maybe Steve41 has something in his software that can provide some data points.


Set up the scenario.... age, retired or working (salary/pension), savings (reg/non/tf/re) and I'll give it a go.


----------



## janus10 (Nov 7, 2013)

It is quite possible that I made yet another mistake. I couldn't see how this structure had any benefit but thought I must be wrong - or else, Gordon Pape who has written books and advised people on financial matters for decades would not only have made an obvious error in his newsletter, but repeated it in the book.

So, while I was typing the original post, I changed my mind and thought I could see somehow that there is an advantage to this strategy. I must admit, now, that after trying to craft an Excel spreadsheet with a scenario, I couldn't come up with one. That doesn't mean that I was initially right and Gordon is wrong, but just that I can't figure out what he and the reader who submitted the idea are talking about. It is possible that there are key details that are missing which would illuminate the benefit.

Let's put it this way - my wife has often reminded me of just how misplaced my confidence in being right can be. A smart ***, always, but not always smart.

Obviously, the TFSA balances must be identical whether you have growth that you leave in, or you have growth that you withdraw and then add back in. I don't see any difference between recontributing the amount you just withdrew or using that TFSA withdrawal to pay for things only to take dividend income and contribute it back - the money is fungible. 

Therefore, I kept focusing on the Non-registered portfolio. 

To me, the advantage would be if somehow you could reduce the dividend income WHILE increasing the after tax income (via less OAS clawback) but maintain at least an equivalent investment total. And, it must be done in such a way that could only come about by using this strategy.

I tried to work it backwards from that premise since I couldn't come up with a way in the normal course of things. I failed.

I've gone ahead and emailed Gordon to ask for clarification on this item. I'll let you know if he responds.


----------



## andrewf (Mar 1, 2010)

This is the guy who was shilling for a reverse mortgage compay, who sell a product that may be appropriate for a narrow range of retired people, but as a whole are preying on vulnerable seniors.


----------



## andrewf (Mar 1, 2010)

Janus, you should automatically be suspicious when he suggests to withdraw only dividends to later recontribute. Any strategy where that would work should theoretically be made more advantageous by withdrawing the entire balance and recontributing it.


----------



## Eclectic12 (Oct 20, 2010)

janus10 said:


> It is quite possible that I made yet another mistake. I couldn't see how this structure had any benefit but thought I must be wrong - or else, Gordon Pape who has written books and advised people on financial matters for decades would not only have made an obvious error in his newsletter, but repeated it in the book.


IMO ... it's a point of view thing.

If one is already pulling income out of the TFSA to support oneself & has taxable income to shelter - it is better than doing nothing. The problem I have is that Pape didn't point out that as described - this strategy locks one into paying the first round of taxes and being subject to the concern (i.e. dividends artificially inflating income for the OAS income test). It is only what happens after the taxes/OAS test is run that is being addressed.

As I say ... a plan to convert capital gains and use the TFSA for dividends makes more sense to me as that will reduce OAS income test concerns about dividends and capital gains likely will reduce taxable income.




janus10 said:


> That doesn't mean that I was initially right and Gordon is wrong, but just that I can't figure out what he and the reader who submitted the idea are talking about. It is possible that there are key details that are missing which would illuminate the benefit.


Without more details or the ability to ask for clarification ... they seem to be missing the forest for looking at the trees.

The first benefit I see are that after being contributed to the TFSA, dividends are no longer an issue - regardless of what they are invested in. I think I've outlined what I think the problem is so I won't repeat it.

The second benefit is that a TFSA withdrawal will become contribution room the following year so that as dividend income increases - more can be sheltered. The problem I see is that ...


janus10 said:


> Obviously, the TFSA balances must be identical whether you have growth that you leave in, or you have growth that you withdraw and then add back in. I don't see any difference between recontributing the amount you just withdrew or using that TFSA withdrawal to pay for things only to take dividend income and contribute it back - the money is fungible.


Now if the money coming out of the TFSA was going to payoff a mortgage or put a new roof on, which meant that say an extra $10K of dividend paying stock could be tax & oas clawback free going forward ... then I see an advantage.





janus10 said:


> To me, the advantage would be if somehow you could reduce the dividend income WHILE increasing the after tax income (via less OAS clawback) but maintain at least an equivalent investment total. And, it must be done in such a way that could only come about by using this strategy.


That's why I think the contributor and Pape have lost sight of the driving forces. The TFSA gives on a second method to reduce taxable dividend income beyond simply converting the dividend paying investments to capital gains paying ones.

Unless one is reducing the dividends paid through either method ... OAS clawbacks remain an issue.


It's a nice tool to keep in mind for when it fits ... but based on the description, it is doing almost nothing to address the main issue. IMO it is sort of like using a hammer to drive a screw into the wall. It will go in but it won't be as effective.


Cheers


----------



## Eclectic12 (Oct 20, 2010)

andrewf said:


> Janus, you should automatically be suspicious when he suggests to withdraw only dividends to later recontribute...


The same dividends is useless.

Spending the withdrawn dividends and contributing the fresh dividends is a bit of a help as future income is now tax free versus buying other investments. It is not much use though.


Withdrawing the dividends to spend for living expense and accelerating transfers of dividend paying stock into the TFSA on the other hand, seems the better approach.


Just my two cents ... :biggrin:



Cheers


----------



## bgc_fan (Apr 5, 2009)

Eclectic12 said:


> The same dividends is useless.
> 
> Spending the withdrawn dividends and contributing the fresh dividends is a bit of a help as future income is now tax free versus buying other investments. It is not much use though.
> 
> ...


Here's my take on it. Would you not end up with the same result if you simply sold $250 worth of stock in the non-registered account and let the $250 worth of dividends become re-invested in a synthetic DRIP? Your end balances in the TFSA and non-registered accounts will pretty much be the same, although you may be down the transaction fee for the $250 of sold stock (less than $10). Capital gains will be a wash as transfering in-kind to the TFSA will still trigger the capital gains tax. 
The other thing of note is that withdrawing $250 from the TFSA means that you can lose close to a year's worth of tax free return (assuming you are withdrawing at the start of the year since you are using the money for living expenses), and this can mitigate the transaction cost to a small degree.


----------



## Eclectic12 (Oct 20, 2010)

bgc_fan said:


> ... Would you not end up with the same result if you simply sold $250 worth of stock in the non-registered account and let the $250 worth of dividends become re-invested in a synthetic DRIP?


This wording is confusing.

If there's $250 of dividends, then likely the stock proceeds would be more like $5K (minus sell commission). 
It is probably not what you meant though ...




bgc_fan said:


> ... Your end balances in the TFSA and non-registered accounts will pretty much be the same, although you may be down the transaction fee for the $250 of sold stock (less than $10).


Where the sale price = transfer price, then yes. 




bgc_fan said:


> ... Capital gains will be a wash as transfering in-kind to the TFSA will still trigger the capital gains tax.


The thing is the sale price may not equal the transfer price, which will affect what the capital gain is.

With my broker, if I call at 3:30pm to request an in-kind transfer to my TFSA, I can choose *any* price the stock has traded during the day. If I am trying to sell, I am limited to whatever someone accepts.

Then too, if the stock has a slow period where traditionally it trades lower (or Dec tax loss selling season) - there is again the opportunity to limit the CG. Since the stock is still owned, nothing is changing except what the CG was set to. Any increases or dividends paid after that are tax free.




bgc_fan said:


> ... The other thing of note is that withdrawing $250 from the TFSA means that you can lose close to a year's worth of tax free return (assuming you are withdrawing at the start of the year since you are using the money for living expenses), and this can mitigate the transaction cost to a small degree.


I would expect one would pull out what one planned on using in Dec to keep the as much tax free as long as possible. Once the withdrawal is made, one wants to be earning a lower amount as the state concern is the OAS clawback. I suppose one could redeploy it to something that avoids dividends but where one is trying to live off it, one probably does not want the volatility of an equity like investment.


Cheers


----------



## bgc_fan (Apr 5, 2009)

Eclectic12 said:


> This wording is confusing.
> 
> If there's $250 of dividends, then likely the stock proceeds would be more like $5K (minus sell commission).
> It is probably not what you meant though ...


That's not what I meant. 

The point is that the person is withdrawing $250 from the TFSA (from dividends) as living expenses and transferring back that equivalent amount in stock the next year in addition to the base TFSA contribution room. You can achieve the same thing by selling the $250 worth of stock that you were going to transfer into the TFSA and leave the TFSA dividends to accumulate more stock within the TFSA. Yes, you can quibble that you might be losing out on some money due to pricing, but when you're talking about $250 worth of stock, there is not going to be that much fluctuation. Conversely, if it is set up with a synthetic DRIP (within the TFSA), you have compounding returns with each dividend payout. Yes you can argue that later on (many years time), it may become more lucrative as your TFSA holdings increase and you receive more dividends that can be withdrawn, but by that time, you may have depleted your non-registered account.

Like I said before, you may lose out on transaction fees and maybe a slight price differential vs transferring in kind, but is it worth the bother to withdraw from the TFSA and transfer back the next year? Obviously the person doing that thinks so, but I don't see that there is much gain to be had.


----------



## Eclectic12 (Oct 20, 2010)

From a dividends put one at risk of OAS clawback, both choices will likely be reducing the % of dividends paid and the risk of an OAS clawback.

The part I wonder about is that with a cheap sell commission of $5, that's 2% of the $250 so I wonder about depleting the non-registered account. The TFSA withdrawal is forgoing the compounding that full shares plus redeployment of the residue would get one but the number of shares aren't being depleted nor is the dividend income being reduced - just a change in location/tax implications.


Like you, I don't see the point but where the person doing it is using dividends - they've already decided the transfers/re-contributions are worth it. I'm suggesting they use at least this amount to attack the problem at source. 

Better yet ... one could be using as much as possible of the TFSA contribution room to make the dividends tax free. Where they've run out of TFSA contribution room, then use the non-registered account for investment income that generates $1 of OAS tested income for $1 or $2 paid instead of $1.40 or so for $1 of eligible dividend.


Cheers


----------

