# Tax Free Savings Account



## jrsaballa (Nov 22, 2015)

Can I really put my money in for a day and then take it out and not have to pay taxes on it?


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## OhGreatGuru (May 24, 2009)

I think you misunderstand the meaning of a TFSA. There no tax on investment earnings made inside the account. But the contributions you make are with after-tax dollars. ie contributions are not tax-deductible, unlike RRSP contributions.


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## jrsaballa (Nov 22, 2015)

good tip, that means i should put money in rrsp first then into tfsa


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## kork (Jun 9, 2012)

jrsaballa said:


> good tip, that means i should put money in rrsp first then into tfsa


No, it depends on your situation. Higher income individuals can benefit greatly from RRSP contributions in an effort to hopefully pay less tax in their later years. However, if you don't earn a significant income, a TFSA would be of more value potentially.


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## Eclectic12 (Oct 20, 2010)

jrsaballa said:


> Can I really put my money in for a day and then take it out and not have to pay taxes on it?


In terms of mechanics ... yes.

You have to keep mind that $$$ contributed are after-tax dollars. Making the contribution uses up TFSA contribution room and when withdrawing, there is no tax implication where the withdrawal amount is available for re-contribution the following year.


Bottom line is that it makes no sense to do this as the main benefit is tax free growth. One day is not enough for any sort of growth.


Cheers


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## jrsaballa (Nov 22, 2015)

anyways the story is I made money on my first year of investing stocks and i wan to keep it tax free, probably 20k


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## 0xCC (Jan 5, 2012)

jrsaballa said:


> anyways the story is I made money on my first year of investing stocks and i wan to keep it tax free, probably 20k


All gains (interest, Canadain dividends, capital gains, foreign dividends after withholding taxes) made *inside* a TFSA are tax free. If the gains were made outside a TFSA and then contributed to a TFSA then there will likely be taxes due on those gains based on their value at the time they were contributed to the TFSA. So if your investing was done in a non-registered account you can't decide to make your gains tax free now. There are some things you can do to minimize the taxes you pay but just contributing to a TFSA and then withdrawing from a TFSA the next day isn't one of those things.

The TFSA is not a magical tax removal machine. Trying to piece together a little bit of what might be your situation here based on your posts I'll try to come up with an example. Let's say you had a $1000 to invest at the start of 2015 in a non-registered account. You invested in company XYZ and you paid $10/share for 100 total shares of XYZ. Over the course of 2015 XYZ's share price has increased to $12/share. If you decide to put your XYZ shares into a TFSA you will trigger what is called a "deemed disposition" which from a tax perspective is the same as if you had sold the shares of XYZ and contributed the $1200 (100 shares at $12/share) to your TFSA. You will owe tax on the $2/share (or $200 total for the 100 share) of capital gains you have in your XYZ holdings. If after you put the XYZ shares into the TFSA the shares increased to $14/share then you don't have to pay any tax on that extra $2/share the XYZ shares made inside your TFSA.


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## jrsaballa (Nov 22, 2015)

nope not in tfsa


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## Eclectic12 (Oct 20, 2010)

jrsaballa said:


> anyways the story is I made money on my first year of investing stocks and i wan to keep it tax free, probably 20k


If it's not in a registered account (i.e RRSP or TFSA) then if it pays income such as dividends or cash distributions, that part will likely be taxable in the tax year it is paid. It is to be reported on the tax return filed by April 30th the following year (i.e. dividends paid in 2015 have to be reported on the 2015 tax return to be filed by April 30th, 2016).

If there is a sale of some/all of the stocks, then capital gains (or loss) will be reported on the tax return for that year.


Where one likes the investment and believes it will keep growing, assuming one has the TFSA contribution room to fit the FMV of the stock, one can transfer the stock into a TFSA that will accept it (ex. transferring Bell Canada common stock to a TFSA that allows only mutual funds or GICs won't work). 

One will have to report the FMV on the day it was transferred then pay the capital gains but going forward, any income paid plus any growth will occur tax free. Or if one is sure a drop is coming, one can sell without any worry about taxes and if it makes sense, one can re-buy.


As per the link below, one can also transfer to an RRSP (which may generate a tax refund). The difference from the TFSA is that any withdrawals in the future are reported as income on that year's tax return (ex. withdraw $2K stock or cash from selling the stock, report RRSP income of $2K).

If it is in one's retirement where one's income level has dropped, this can work out. If one has a low income where other sources of income can drive one's income higher than when one contributed, it might not be a good deal.

http://www.taxtips.ca/personaltax/investing/transfersharestorrsp.htm


Cheers


*PS*

As an example of when it makes sense to transfer in-kind to a TFSA, I bought a stock that paid dividends (which I paid taxes on every year). In early 2009, I didn't have the free cash to contribute to the TFSA but noticed this stock had dropped with the market to just about what I paid for it. After confirming that it likely wouldn't tank, I transferred it to my TFSA at a value of less than $5K (i.e. it fit within my TFSA contribution room) for a capital gain of $200. 

It has since returned to it's former high and now all the dividends paid (or if I choose to sell it - the capital gains as well) are tax free.


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