# TSFA Question



## Fraser19 (Aug 23, 2013)

Hello,

I have been looking more into a TSFA however I have a question about it that the online person at CIBC couldn't explain very clearly. 

https://www.cibc.com/ca/investing/t...cct.html?int_id=IntTFSA-TFSA-TASA-LearnMore-E

That is what I was looking at. Right now the Interest rate is 1.000 



> The CIBC TFSA Tax Advantage Savings Account is an attractive daily interest savings account option in which you earn a competitive, guaranteed high interest rate tax-free and you have access to your money any time.


This is what I am a little confused about. Dose this mean I earn 1.000% daily and it is paid to me once per month? 
Sorry I have been reading about this and I find it generally takes me a fair bit of time to fully understand how things like this work. I have generally stuck to my RRSP as I have had great success with it so far. 

The only reason why I am looking at this is because when I retire my RRSP payout will have me in a high tax bracket than I am currently if I keep contributing as I am. 

Also after playing with a TSFA calculator the gains don't really seem that amazing I mean if I maxed mine out for the 40 years I would get 18k off of the interest. Is there something else that makes this appealing. I am pretty sure there isn't a tax deferral like there is with an RRSP. What are the other advantages if there are any?

On second thought I guess the way this would really pay would be through mutual fund gains as I am assuming the increase in values from the mutual fund would not cut from the contribution limit?

Thanks,
Fraser


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## Spudd (Oct 11, 2011)

You would earn 1% annually but it's calculated daily and paid to you monthly, so it compounds a little faster than 1%. But this is a terrible rate for a TFSA savings account - check out http://www.highinterestsavings.ca/chart/ to see the various rates available from different banks for TFSA's. 

The advantage of a TFSA is that you are not taxed on the gains you make from your money. If you have a normal savings account (non-TFSA), then you have to pay tax on the interest. If it's in a TFSA, you don't. 

But a TFSA is just a type of account, that you can also put stocks, mutual funds, GICs, whatever you like inside.


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## Eclectic12 (Oct 20, 2010)

Fraser19 said:


> ... Is there something else that makes this appealing. I am pretty sure there isn't a tax deferral like there is with an RRSP. What are the other advantages if there are any?


As Spudd says - the TFSA is tax free, with one small exception - the IRS will take from source a 15% withholding tax on US stock dividends/interest. (In contract, the US-Canada tax treaty recognises the RRSP as a retirement account and there is no withholding tax applied by the IRS.)

Another big advantage is that if you need money - withdrawals from the TFSA are not taxed (where the RRSP withdrawal is reported as income and taxed). The withdrawal amount is added *the following year* to the available TFSA contribution room. So other than waiting some months, money can be taken out and put back easily.




Fraser19 said:


> ... On second thought I guess the way this would really pay would be through mutual fund gains as I am assuming the increase in values from the mutual fund would not cut from the contribution limit?


Yes - investments that gain more will be a better deal than the 1%.

I'm not sure where this idea that growth in the TFSA affects the contribution limit. 
The contribution limit only applies to contributions. 

The gov't granting a new allotment increases what is available, money contributed reduces what's available and withdrawals turn back into available contribution room the following year.

The only connection between what value of the investments become and the available TFSA room is that if the investment grows and a withdrawal is made, there will be more overall room.


To use an example to illustrate:

Person A has never contributed to their TFSA and was 21 in 2009. Their available TFSA contribution room is what the gov't has granted. This is 4 x $5K (2009 - 2012 amounts) + $5.5K (2013 amount) = $25.5K, where the value of the TFSA is $0.

Person B was is the same age but in 2009, put $5K into their TFSA, which today is worth $10K.
Their available room = amount granted - contributions = $25.5K - $5K = $20.5K, where the value of the TFSA is $10K.

Person B is farther ahead as their investments have grown but this growth has no impact on the TFSA contribution room, at this point.


Now say person B withdraws $7K in 2013 - let's look at what the situation is in 2014:

Person A TFSA contribution room = Unused room + 2014 allotment = $25.5K + $5.5K = $31K, with a TFSA value of $0.

Person B TFSA contribution room = Unused room + 2014 allotment + 2013 withdrawal = $20.5K + $5.5K + $7K = $33K, with a TFSA value of $3K.


So the gain in the TFSA does not affect the contribution room unless a withdrawal is made.

The dark side is that if one sells an investment for a loss - that destroys the TFSA contribution room as only growth by other investments can replace it.


Cheers


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## liquidfinance (Jan 28, 2011)

I'm amazed you couldn't get the information required from the bank. 

However. You can do a lot better. 

The best basic interest rate out there is 3% with peoples trust. Some on here will say it has more risk but it is the best rate.

To really unlock the power of a tfsa you have to consider being self directed. If you don't want to be hands on or read through earnings reports then take a look at the couch potato strategy.


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## Eclectic12 (Oct 20, 2010)

Fraser19 said:


> The only reason why I am looking at this is because when I retire my RRSP payout will have me in a high tax bracket than I am currently if I keep contributing as I am ... if I maxed mine [ TFSA ] out for the 40 years


Hmmm ... what assumptions are going into your analysis that make you believe your yearly RRSP withdrawals will result in the higher tax bracket, given that you appear to have a long time to put aside money? Most of the posts I've read where people were concerned, they were close to retirement and were adding up *all* sources of income (ex. company pension, investments, CPP etc.).

Assuming it really is an issue, the other question is do you see any opportunities to withdraw from the RRSP at a lower income level than when all of the sources kick in? 




Fraser19 said:


> Also after playing with a TSFA calculator the gains don't really seem that amazing I mean if I maxed mine out for the 40 years I would get 18k off of the interest ...


That's a function of the 1% interest ... which would be equally underwhelming in an RRSP (but would help with the "too much RRSP income" :biggrin.

Whereas some of my stock purchases from 2009 in both my TFSA and RRSP pay dividends of over 5% and are trading for 90% or better than the purchase price.


Cheers


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## newfoundlander61 (Feb 6, 2011)

I have been with CIBC for years and have found that many of the sales staff including the ones that are licensed to sell investment products don't know the details about the products they sell. Some do but many do not, if you open a TFSA with CIBC investors edge it is very easy to manage and use on your own from home, the trick is getting it open. Maybe a monthly income fund for a TFSA would work for you in regards to regularly monthly increases in your investment.


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## Fraser19 (Aug 23, 2013)

Thanks guys that clears a lot up for me.

One more question.
So the current annual contribution room is 5500.00 this last par where I am a little confused is the roll over as somewhat explained by CIBC. So if i have 5500.00 in the account and take out 2000.00 I can contribute 7500.00 the next year? That is how I currently understand it however I am not sure if I am right.
Also if that is correct say I didn't contribute for three of the four years would that mean I could contribute 22000.00 on the fifth year? To try and say that more clearly will all unused contribution room carry forward indefinitely?


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## liquidfinance (Jan 28, 2011)

This year the room was increased by $5500

Yes you can contribute the $2000 withdrawn the following year + the 2014 allowance giving you the $7500 room for 2014

You overall allowance depends on a couple of factors. 

Were you resident in Canada in 2009 and how old were you in 2009. 

If you have been resident of Canada and were over 19 in 2009 then you have $25500 to contribute.

If you have never used a TFSA then you could put all $25500 into the TFSA this year. 

http://www.cra-arc.gc.ca/tx/ndvdls/tpcs/tfsa-celi/lgbl-eng.html


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## Fraser19 (Aug 23, 2013)

liquidfinance said:


> This year the room was increased by $5500
> 
> Yes you can contribute the $2000 withdrawn the following year + the 2014 allowance giving you the $7500 room for 2014
> 
> ...


I am 24 and have always lived in Canada. 
So if I am understanding correctly I can contribute up to around 30,000.00?


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## Eclectic12 (Oct 20, 2010)

Fraser19 said:


> Thanks guys that clears a lot up for me.


You are welcome.




Fraser19 said:


> One more question.
> So the current annual contribution room is 5500.00 this last par where I am a little confused is the roll over as somewhat explained by CIBC. So if i have 5500.00 in the account and take out 2000.00 I can contribute 7500.00 the next year? That is how I currently understand it however I am not sure if I am right.


I'm not sure what you mean by "rollover" ... it is sounding like you mean the re-contribution of withdrawals.

If you mean withdrawals, then yes. 

To use different numbers to make it clearly show what is coming from where, if one has $19K in the TFSA in 2013 and then withdraws $2K in 2013 - the minimum one could contribute in 2014 is $7.5K (the 2014 grant of $5.5K + the 2013 withdrawal of $2K).

I say minimum as the other source of contribution room is any of the 2009 to 2013 TFSA contribution room that has not been used (assuming one was 18+ in 2009 and has been a Canadian resident for each of those years).




Fraser19 said:


> Also if that is correct say I didn't contribute for three of the four years would that mean I could contribute 22000.00 on the fifth year?
> 
> To try and say that more clearly will all unused contribution room carry forward indefinitely?


The unused TFSA contribution room is carried forward indefinitely (same as RRSP contribution room).
Whether the $22K is okay or an over-contribution that will be subject to a 1% per month penalty until a change is made (same as RRSP), depends on few things. 

The first is assumption is that one was 18+ in 2009 and that one has been a Canadian resident for tax purposes all five years.

The second is what unknown amount was contributed to the the TFSA in the fourth year. 
If you say there were none - then this is the same as my upthread example of Person A, who would have $25.5K of available room in 2013. The 2013 contribution of $22K would fits into this and would leave a 2013 available contribution room of $3.5K.

If the year four TFSA contribution was $3.5K or less, then the $22K will also fit. A contribution that exceeds $3.5K will be an over-contribution, triggering the penalty.


Cheers


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## Eclectic12 (Oct 20, 2010)

Fraser19 said:


> I am 24 and have always lived in Canada.
> So if I am understanding correctly I can contribute up to around 30,000.00?


Hmmm ... are you reading my examples? 

Anything over $25.5K is definitely an over contribution that will be assessed at minimum a 1% per month penalty, until the excess amount is removed.


If you turned 24 in 2013 - you would have turned 20 in 2009 so that you have the potential of five years TFSA contribution room (the 18+ years old criteria).
If you've lived in Canada and been filing tax returns - that confirms five years (the Canadian resident criteria).

Assuming you have made no TFSA contributions to date - this makes you person A and you have $25.5K TFSA contribution room available to use.

To break the $25.5K down:
a) Jan 1, 2009 - $5K granted.
b) Jan 1, 2010 - $5K granted, previous unused room carried forward.
c) Jan 1, 2011 - $5K granted, previous unused room carried forward.
d) Jan 1, 2012 - $5K granted, previous unused room carried forward.
e) Jan 1, 2013 - $5.5K granted, previous unused room carried forward.

As you contribute - the available room goes down, as you withdraw - nothing happens to the contribution room the year the withdrawal was made but the next year, the withdrawal is re-added (see my Person B example in the earlier post).


I'm not sure where any confusion lies ....


Cheers


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## SpendLessEarnMore (Aug 7, 2013)

thanks for the explanation. So I gather the key to growing the contribution room is to withdraw all the money near year end and re-contribute it back in the New Year. I'm going to try this although I may allocate it to my new Self-directed RRSP.



Eclectic12 said:


> As Spudd says - the TFSA is tax free, with one small exception - the IRS will take from source a 15% withholding tax on US stock dividends/interest. (In contract, the US-Canada tax treaty recognises the RRSP as a retirement account and there is no withholding tax applied by the IRS.)
> 
> Another big advantage is that if you need money - withdrawals from the TFSA are not taxed (where the RRSP withdrawal is reported as income and taxed). The withdrawal amount is added *the following year* to the available TFSA contribution room. So other than waiting some months, money can be taken out and put back easily.
> 
> ...


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## yyz (Aug 11, 2013)

"So I gather the key to growing the contribution room is to withdraw all the money near year end and re-contribute it back in the New Year"

Unless you actually needed the money what would the point be of withdrawing it all before the end of the year?


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## Eclectic12 (Oct 20, 2010)

SpendLessEarnMore said:


> thanks for the explanation.
> 
> So I gather the key to growing the contribution room is to withdraw all the money near year end and re-contribute it back in the New Year.
> I'm going to try this although I may allocate it to my new Self-directed RRSP.


Please re-read the examples.

The only source of increasing TFSA contribution room is *investments growing* within the TFSA.


Ignoring any costs for buying and selling - put one dollar into the TFSA, buy an investment for one dollar, sell for one dollar and withdraw one dollar results in being able to put one dollar back.

Being able to put the new allotment of TFSA contribution room plus the one dollar back the following year *looks like an increase but it is not*.


Real growth is put one dollar into the TFSA, buy an investment for one dollar, sell for *five dollars* and withdraw five dollars. 

What I'm calling destruction of TFSA contribution room is to put one dollar into the TFSA, buy an investment for one dollar, sell the investment for $0.30 and withdraw. 



Why are you interested in growing TFSA contribution room?


The main use I can see for withdrawals temporarily increasing the available TFSA contribution room is to help move investments already owned from a taxable account into the TFSA, where the amount planned to move is more than the available TFSA contribution room. (Ex. used all room this year, next year will grant $5.5K but stock is worth $6.5K - withdrawing $1.5K in cash in Dec will give enough additional room to allow the full transfer).

If one need to spend the money - that's another reason to withdraw.

Other than that - IMO it's better to leave it in the TFSA and keep growing it tax free.



Cheers


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## Eclectic12 (Oct 20, 2010)

yyz said:


> "So I gather the key to growing the contribution room is to withdraw all the money near year end and re-contribute it back in the New Year"
> 
> Unless you actually needed the money what would the point be of withdrawing it all before the end of the year?


If one temporarily needs extra room in a given year - the withdrawal would accomplish this.

If one has used up all of one's contribution room and plans to transfer stock worth $6.5K but is only going to be granted $5.5K the next year - a withdrawal of at least $1.0K in Dec this year would mean that in Jan, there is $5.5K + $1.0K = $6.5K to allow the stock transfer.

Other than that - one might as well leave it in the TFSA, hopefully growing tax free.


Cheers


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## Butters (Apr 20, 2012)

SpendLessEarnMore said:


> thanks for the explanation. So I gather the key to growing the contribution room is to withdraw all the money near year end and re-contribute it back in the New Year. I'm going to try this although I may allocate it to my new Self-directed RRSP.


The key to growing the contribution room is not to have losses. 


If you like where your money is, there isn't much point of transferring it in December and transfer back in jan. unless of course u wanted to change stocks around.


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## humble_pie (Jun 7, 2009)

Eclectic12 said:


> The main use I can see for withdrawals temporarily increasing the available TFSA contribution room is to help move investments already owned from a taxable account into the TFSA, where the amount planned to move is more than the available TFSA contribution room. (Ex. used all room this year, next year will grant $5.5K but stock is worth $6.5K - withdrawing $1.5K in cash in Dec will give enough additional room to allow the full transfer).



the way i see it, this is too cumbersome a strategy because of the need to calibrate all prices over the 3-day new year's holiday weekend.

much easier imho to just sell the security in the tfsa that was planned to be withdrawn. Call it stock ABC. Sell ABC to get cash in tfsa. Then add the new contribution early in the new year. Then buy the desired new security - call it stock XYZ - with the total cash early in the new year.

meanwhile in the cash or margin account, sell the existing holding of XYZ if you want. In either case - whether sold outright or contributed in kind to a registered account - there is going to be a capital gains/loss accounting for disposition of XYZ. I acknowledge that in some cases it can be desirable to sell an XYZ for a tax loss, but i also believe the 30-day tax loss rules will apply. I am actually not sure what this means when a tax loss sale occurs in cash or margin account while a purchase of the same stock in less than 30 days occurs in a registered account. It may mean that the tax loss from cash/margin sale cannot be claimed.

on the other hand, if XYZ is rising nicely, so that sale in cash/margin would mean a capital gain - there is no 30-day rule on capital gains - why would the investor want to sell XYZ in the first place? why not just add to nice total holding by buying more shares in the tfsa?


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## Eclectic12 (Oct 20, 2010)

humble_pie said:


> the way i see it, this is too cumbersome a strategy because of the need to calibrate all prices over the 3-day new year's holiday weekend.


Depends on the situation ... when I did it, I'd already sold the stock in the TFSA and only needed about $1K to move the taxable account stock in. Then too, the taxable account stock was trading regularly above and below my purchase price for about five months.




humble_pie said:


> much easier imho to just sell the security in the tfsa that was planned to be withdrawn. Call it stock ABC. Sell ABC to get cash in tfsa. Then add the new contribution early in the new year. Then buy the desired new security - call it stock XYZ - with the total cash early in the new year.


Why not withdraw the cash?

If the taxable account stock isn't co-operating, one can add it to the fresh contribution and buy the matching amount in the TFSA. The taxable investment can be sold or transferred at a later date when it's no longer desired.

If the stock prices co-operates at it did in my case, I ended up with a stock I already liked in the TFSA, with a nominal deemed disposition capital gain of $0.05 a share.


If it's a volatile stock or there's nothing one wants to sell in the TFSA - that's a different ball game.




humble_pie said:


> ... I acknowledge that in some cases it can be desirable to sell an XYZ for a tax loss, but i also believe the 30-day tax loss rules will apply. I am actually not sure what this means when a tax loss sale occurs in cash or margin account while a purchase of the same stock in less than 30 days occurs in a registered account. It may mean that the tax loss from cash/margin sale cannot be claimed.


The way I read the web articles about the superficial loss rules and several threads in the taxation section agree that capital loss can't be claimed.

That's why I had a positive target in mind and on some days that I checked, no transfer happened and the day it traded for the target price - I called to arrange the transfer, including identifying the price to record the transfer at.

It was suggested in the taxation section that if it was a small capital loss and the loss was not claimed - CRA may not bother worrying about it but I don't recall anyone confirming they'd talked to CRA about it.




humble_pie said:


> on the other hand, if XYZ is rising nicely, so that sale in cash/margin would mean a capital gain - there is no 30-day rule on capital gains - why would the investor want to sell XYZ in the first place? why not just add to nice total holding by buying more shares in the tfsa?


The main reason I can think of is if the person in question doesn't have the cash to contribute and figures the capital gain is small enough compared to holding the investment in the TFSA tax free for however many years.

A side benefit - if the timing works, is that one's income is staying the same but the taxable income is dropping.


An ever better question regarding the original thread - if there is growth in the TFSA, why bother with withdrawals at all?
The steps I'm talking about are the main reason I can think of and I've only used it once - so IMO, it's an exception situation thing.


Cheers

*P.S.*

I was focused on figuring out why the OP might care about growing the TFSA contribution room that I didn't mention that it's not likely something that can be done year by year by year.


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## SpendLessEarnMore (Aug 7, 2013)

Thinking about it it does make sense and quite pointless whether withdrawing it at year end and putting it back in new year or just leaving it there. The contribution would always be the same + or - what you have gained or lost in the TFSA.


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## liquidfinance (Jan 28, 2011)

SpendLessEarnMore said:


> Thinking about it it does make sense and quite pointless whether withdrawing it at year end and putting it back in new year or just leaving it there. The contribution would always be the same + or - what you have gained or lost in the TFSA.



It does make sense if your planning a purchase within the first couple of months. Withdraw in December spend in Jan / Feb then put all of it back by year end if funds allow. Seem better than taking out in January and having to wait until the following year.


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## Guban (Jul 5, 2011)

Eclectic12 said:


> As Spudd says - the TFSA is tax free, with one small exception - the IRS will take from source a 15% withholding tax on US stock dividends/interest.
> Cheers


There is no longer a withholding tax for US interest to Canadians.


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## andrewf (Mar 1, 2010)

I think you're mistaken, Guban. Do you have a source?


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## Guban (Jul 5, 2011)

andrewf said:


> I think you're mistaken, Guban. Do you have a source?


Try:
http://www.kpmg.com/Ca/en/IssuesAnd...holding-tax-rates-for-treaty-countries-v2.pdf


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## humble_pie (Jun 7, 2009)

Guban said:


> Try:
> http://www.kpmg.com/Ca/en/IssuesAnd...holding-tax-rates-for-treaty-countries-v2.pdf



guban i could be mistaken also but the way i read this list - noting that canada is missing - is that these are the withholding tax rates that canada levies upon each of its bilateral tax treaty partners.

the rates shown for the US are canadian NR tax rates for US residents, imho.

nothing in this list suggests to me any NR withholding rate which the US might impose upon its interests, dividends, royalties, etc paid to non-US-residents.

perhaps this is wrong, though?


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## My Own Advisor (Sep 24, 2012)

I didn't read where this applies to TFSA...


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## humble_pie (Jun 7, 2009)

advisor the tax treaty was drawn up signed & ratified years before the tfsa was even dreamed of, so it treats US investment income in tfsas the same as in cash or margin accounts ...

besides i'm fairly sure that all rates shown are canadian rates for residents of each of the treaty countries.

as for US rates, didn't it use to be that these were staggered according to what kind of interest instrument it was? ie whether US bank account, US treasury bond, state or municipal bond, corporate bond, etc. It would be nice to have an update on the situation today each:


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## My Own Advisor (Sep 24, 2012)

Correct humble, I am aware the U.S.-Canada tax treaty has not been updated to acknowledge the TFSA is a retirement account, if ever recognized or considered as this at all.


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## humble_pie (Jun 7, 2009)

i don't think "update" would be the right word here ... there would be a bilateral committee of parliament plus congress plus ministries of finance of both countries monitoring fiscal developments in the light of the existing tax convention ... do not changes/additions to the tax treaty have to be ratified by both parliament & congress? ... does the US have a tax vehicle similar to our tfsa so it might make sense to swap benefits? ... ouf ... so much bureaucracy ... the mind fails ... the heart boggles ... bref it seems to me that tax conventions get modified maybe a few times in a century ...


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## andrewf (Mar 1, 2010)

Guban said:


> Try:
> http://www.kpmg.com/Ca/en/IssuesAnd...holding-tax-rates-for-treaty-countries-v2.pdf


Seems to me those are the rates Canada withholds taxes at for foreign residents, not the rate that Canadians pay on foreign holdings.


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## humble_pie (Jun 7, 2009)

andrew why are you repeating me

what the thread is looking for now is someone who has the US list of NR taxes imposed by that country upon canadian residents ...


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## andrewf (Mar 1, 2010)

Apologies, I didn't see your reply.


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## liquidfinance (Jan 28, 2011)

humble_pie said:


> guban i could be mistaken also but the way i read this list - noting that canada is missing - is that these are the withholding tax rates that canada levies upon each of its bilateral tax treaty partners.
> 
> the rates shown for the US are canadian NR tax rates for US residents, imho.
> 
> ...



Humble - I'm sure these are the rates imposed on tax residents of Canada. 

This is why Canada is missing from the list. Canada doesn't withhold the tax from it's residents in any savings vehicle does it?


EDIT** On second thoughts this shows a tax rate on dividends from the UK. They don't withold any taxes on dividends so this makes me think you are correct.


Interest income subject to withholding taxes 

http://www.irs.gov/Businesses/U.S.-Tax-Withholding-on-Payments-to-Foreign-Persons


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## humble_pie (Jun 7, 2009)

liquidfinance said:


> Humble - I'm sure these are the rates imposed on tax residents of Canada.
> 
> This is why Canada is missing from the list. Canada doesn't withhold the tax from it's residents in any savings vehicle does it?
> 
> ...




the thing is, liquid, the title of the list and/or its summary explanation - its raison d'etre so to speak - are missing. So we don't really know the true nature of this beast.

may i draw your attention to the line entry for the US, though. Those dividend figures are not the correct US figs, which go something like 30/15. It was this detail that threw me off believing that the list was about what other countries do ... & made me think that, instead, it's the list of canadian withholding taxes for each of the countries etc etc.

ps can we task you with finding out what is the true rate of US withholding on interest payments for canadian residents? it might turn out to be a staggered rate, depending on the nature of the interest-bearing investment


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## Guban (Jul 5, 2011)

Ok, try this one:
http://www.bmonesbittburns.com/IA/I...D=MCLARK&LANGUAGE=EN&NEWS_ID=142&VERSION=null

This is a Canadian source describing US withholding on Canadian tax payers.


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## humble_pie (Jun 7, 2009)

we are cross-posting
anyhow here's an attempt at a joke
please forgive if not funny or if i already posted it, 9:56 am is far too early for a dumb crumb

apparently great britain the mother of us all learned to never again tax her citizens who had permanently departed the sceptred isle
she learned this to her sorrow right after the Boston Tea Party


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## humble_pie (Jun 7, 2009)

Guban said:


> Ok, try this one:
> http://www.bmonesbittburns.com/IA/I...D=MCLARK&LANGUAGE=EN&NEWS_ID=142&VERSION=null
> 
> This is a Canadian source describing US withholding on Canadian tax payers.


thankx guban, this is an excellent document but, having been published in may 2009, it's a bit out of date with respect to estate taxation.

i assume the zero NR tax on US interest for canadian residents still applies, though.


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## Eclectic12 (Oct 20, 2010)

liquidfinance said:


> It does make sense if your planning a purchase within the first couple of months.
> 
> Withdraw in December spend in Jan / Feb then put all of it back by year end if funds allow. Seem better than taking out in January and having to wait until the following year.


I'm thinking here by "purchase", you mean that one needs the money for something other than an investment (ex. car, roof repairs, house, make extra payments against the mortgage, RRSP contribution, etc.). If so, agreed.

Like SpendLessEarnMore - I'm thinking the OP is confusing late year withdrawals and early year re-contributions as something that increases the overall TFSA contribution room instead of something that is a $ for $ bump up in the following year's TFSA contribution room.

If the point is to buy a stock with the cash in the TFSA and there is no other factor to consider - one is better to skip the withdrawal and buy the stock when it is at a desirable price.


Cheers


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## liquidfinance (Jan 28, 2011)

Eclectic12 said:


> I'm thinking here by "purchase", you mean that one needs the money for something other than an investment (ex. car, roof repairs, house, make extra payments against the mortgage, RRSP contribution, etc.). If so, agreed.
> 
> 
> Cheers


Yes that was why meaning.


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## liquidfinance (Jan 28, 2011)

humble_pie said:


> i assume the zero NR tax on US interest for canadian residents still applies, though.


Surely we must have some members on here who hold US bond funds that can confirm if the brokerage is withholding any taxes?


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## Eclectic12 (Oct 20, 2010)

liquidfinance said:


> Surely we must have some members on here who hold US bond funds that can confirm if the brokerage is withholding any taxes?


Forgive my ignorance if bonds are different ... but would it not be the same as the stock or ETF where it is the source that pays the money (i.e. the US source) that is responsible to deduct the withholding tax & forward it to the IRS - not the Canadian brokerage?

The reverse situation is that a US resident owning, say BNS - it is BNS that is responsible for deducting the Canadian withholding tax on dividends and forwarding to the CRA, not the US brokerage.


Cheers


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## Guban (Jul 5, 2011)

liquidfinance said:


> Surely we must have some members on here who hold US bond funds that can confirm if the brokerage is withholding any taxes?


I agree! However, I'm not sure if the trust or corporate structure of a fund obeys the same rules, although it should. 

Any US bond holders out there?


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## Guban (Jul 5, 2011)

Eclectic12 said:


> Forgive my ignorance if bonds are different ... but would it not be the same as the stock or ETF where it is the source that pays the money (i.e. the US source) that is responsible to deduct the withholding tax & forward it to the IRS - not the Canadian brokerage?
> 
> The reverse situation is that a US resident owning, say BNS - it is BNS that is responsible for deducting the Canadian withholding tax on dividends and forwarding to the CRA, not the US brokerage.
> 
> ...


I don't know who collects the withholding tax on US stocks, but I do know that I don't get to keep 100% of the dividends and I assume that it is the brokerage since I gave them the W8 BEN form. On a practical note, the individual company like BNS wouldn't be happy having to keep track of each shareholder and their tax country.

Bonds pay interest and this distinguishes them from stocks so the withholding taxes for the two are different. See my original link that describes the different categories such as periodic pension vs lump sum ones.


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## humble_pie (Jun 7, 2009)

re US withholding NR (non-resident) tax on interest payments:

guban has been kind enough to provide the link to an excellent 2009 bmo nesbitt article on US taxation as it affects canadian residents. This article points to a 2008 re-negotiation of certain aspects of the canada/US tax convention which eliminated (the article said) withholding tax on all forms of interest paid to canadians by US organisms.

however i for one am only 95% convinced by this article. The other 5% of my mind remains slightly skeptical. In liquidfinance's IRS links can be found the following declaration (it's in IRS publication 515):

_Interest on bonds of a U.S. corporation paid to a foreign corporation not engaged in a trade or business in the United States is subject to NRA withholding even if the interest is guaranteed by a foreign corporation that made payment outside the United States._ 

& there are other IRS citations in liquid's link which indicate that NR withholding tax on interest payments is still alive & well in the US of A.

these may explain why some US bond funds are still subject to US withholding.


re the issue of who remits to the IRS:

it wouldn't be the individual canadian brokers. This would be far too antiquated a method of collecting what's owed to Big Sam.

instead, collection of US NR withholding tax dollars would be done through the CDS system, i believe, or through the connecting US broker/dealer electronic networks which feed billions of transactions into CDS every day.

collection of NR withholding tax owed to washington would be done prior to the delivery of actual interest or dividend monies to the individual canadian brokers, i do believe. Data, however, would be supplied to every canadian broker along with the net monies to which each broker's clients would be entitled. This is the data that appears in our accounts, confirming any foreign tax that has been charged.

recently i've been doing research into the mechanics of how brokers get to charge hidden foreign exchange (FX) fees upon surprising classes of dividends, including dividends paid by at least 20 important canadian companies. Quite often, part of these nasty goings-on are being delivered to brokers by the CDS system. The Canadian Depository System. Owned & operated by the collective broker industry. A legacy system that is old, written perhaps 30, 40 or 45 years ago & extremely difficult to change.

what i've discovered is that even high-level executives at brokerage houses frequently don't know, exactly, what the CDS system is doing. No wonder their minions - the representatives who answer the phone in call centres - often have no clue about these hidden operations!


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## Eclectic12 (Oct 20, 2010)

Guban said:


> I don't know who collects the withholding tax on US stocks, but I do know that I don't get to keep 100% of the dividends and I assume that it is the brokerage since I gave them the W8 BEN form. On a practical note, the individual company like BNS wouldn't be happy having to keep track of each shareholder and their tax country.


There's lots of things companies don't like but put up with as it's a cost of doing business. The too, it ends up being an expense that's being written off. Where the gov't has mandated it and all the other companies have to do the same - then it's going to happen.


Practically speaking - which is more likely?

Option 1:
The gov't (Canada or US) that is expecting dividend withholding taxes trusts the brokerage (which may or may not have a subsidiary in their country) to send the appropriate taxes. 


Option 2:
The gov't mandates that the company that is already under their juristiction that is paying the dividend and can easily be dealt with if they don't follow through properly, sends the gov't the dividend withholding taxes.

If it was me receiving the taxes - I know which I'd want.


Incidentally - if as you assume, it's the Canadian broker that's forwarding the withholding tax to the IRS then what's you thoughts on who is forwarding this tax for the shares I have with IBM that I picked up as an employee? There's no Canadian brokerage involved.




Guban said:


> Bonds pay interest and this distinguishes them from stocks so the withholding taxes for the two are different. See my original link that describes the different categories such as periodic pension vs lump sum ones.


The amounts may differ but I'd expect the mechanism for forwarding the taxes to be the same. 


Any experts who can confirm or deny?


Cheers


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## humble_pie (Jun 7, 2009)

Eclectic12 said:


> which is more likely?
> 
> Option 1:
> The gov't (Canada or US) that is expecting dividend withholding taxes trusts the brokerage (which may or may not have a subsidiary in their country) to send the appropriate taxes.
> ...



eclectic u are on the right track je pense. Read liquid's IRS links. Collection of US NR withholding tax is clearly done by US of A agents, probably in the broker/dealer electronic networks that are connected to the canadian CDS system.

the US agents are acting on behalf of the hundreds of thousands (millions?) of US companies etc that pay out dividends, interests & other payments to non-residents ... probably charging em a fee for the service, which would be wholly justified ... in liquid's links you can see the IRS itself stating clearly that the US payor of income to a non-resident entity must collect & remit the NR taxes otherwise there is a hefty penalty.

in some cases (alimony for example) an individual US person must withhold & remit the NR tax; but one would expect an industry as massive & as well developed as the brokerage industry to have age-old electronic systems capable of processing everything accurately.

all that gets delivered to a canadian broker would be the net monies plus the data concerning the transaction. After all, this broker is the only party along the route who has any contact with the ultimate beneficial owner of the security.

as you suggest, it would be inconceivable that the IRS would ever entrust collection of the monies owing to itself to an armada of foreign brokers located in godforsaken corners of the earth.


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## liquidfinance (Jan 28, 2011)

I did come across this 



> "Distributions paid on the shares of a U.S. iShares Fund are generally classified as dividends under U.S. tax
> rules and therefore subject to U.S. withholding taxes, even where the distributed income results from interest
> payments on fixed income securities. Interest income arising from direct investments in U.S. fixed income securities
> is generally not subject to U.S. withholding taxes. As a result, XIG and XHY may earn less income from
> ...


This is from 2010 

http://www.financialwebring.org/forum/viewtopic.php?f=32&t=112656


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## Eclectic12 (Oct 20, 2010)

humble_pie said:


> eclectic u are on the right track je pense. Read liquid's IRS links. Collection of US NR withholding tax is clearly done by US of A agents, probably in the broker/dealer electronic networks that are connected to the canadian CDS system.
> 
> the US agents are acting on behalf of the hundreds of thousands (millions?) of US companies etc that pay out dividends, interests & other payments to non-residents ... probably charging em a fee for the service, which would be wholly justified ... in liquid's links you can see the IRS itself stating clearly that the US payor of income to a non-resident entity must collect & remit the NR taxes otherwise there is a hefty penalty ...


This makes far more sense to me as most gov'ts don't like to take chances with their tax revenue. Once the money is off to another country - those will good relations will likely be ok but there's lots of examples where there are issues.

Come to think of it - it's probably pretty close the same thing as the companies contracting for a transfer agent to take care of their DRiP program. It is likely a matter of what entity has the broadest reach & can provide the service reliably, at a low fee.

It would not surprise me if the company is still legally on the hook despite someone else taking care of the nitty gritty details. Just like one can contract with a tax professional to file one's tax return but if there's any errors resulting in owing money, CRA will still hold the tax payer responsible.




humble_pie said:


> ... all that gets delivered to a canadian broker would be the net monies plus the data concerning the transaction. After all, this broker is the only party along the route who has any contact with the ultimate beneficial owner of the security.
> 
> as you suggest, it would be inconceivable that the IRS would ever entrust collection of the monies owing to itself to an armada of foreign brokers located in godforsaken corners of the earth.


 ... makes sense ... after all it is CRA who wants to know the beneficial owner details for the Canadian taxes - the IRS mainly cares to be sure the maximum rate is sent to them (30% for those without a W8-BEN or tax treaty and 15% for beneficial owners that have a W8-BEN or other proof on file). 

[ I suppose they'll want a detailed audit trail for investigations but probably don't ask for this for each transactions - similar to CRA saying "keep your charitable receipts on file, we'll ask for them if we have concerns". ]



Cheers


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## Eclectic12 (Oct 20, 2010)

liquidfinance said:


> I did come across this [ ... indicating the US legislation needs extension ... ]
> 
> This is from 2010
> 
> http://www.financialwebring.org/forum/viewtopic.php?f=32&t=112656


I wonder with all the other side shows, whether this extension has been passed .... 


Cheers


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## Guban (Jul 5, 2011)

Eclectic12 said:


> P
> Option 1:
> The gov't (Canada or US) that is expecting dividend withholding taxes trusts the brokerage (which may or may not have a subsidiary in their country) to send the appropriate taxes.
> 
> ...


I understand what you are saying, but here's another cog in the wheel. The shares we "own" in our brokerage accounts are not in our name. They are in street name. This is unlike the IBM shares you own directly.

This is not usually an issue, but what happens if the brokerage goes bankrupt? If I'm holding $100 million worth of shares in a company, I understand that I'm not going to get all of that money. Of course, that's not a problem for me yet! :chuncky: and hopefully we won't see Canadian brokerage firms go belly up any time soon.


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## Eclectic12 (Oct 20, 2010)

Guban said:


> I understand what you are saying, but here's another cog in the wheel. The shares we "own" in our brokerage accounts are not in our name. They are in street name. This is unlike the IBM shares you own directly.


All the more reason for whichever gov't is charging the withholding tax to want their slice removed before the street or direct owner receives the payments.




Guban said:


> This is not usually an issue, but what happens if the brokerage goes bankrupt?
> If I'm holding $100 million worth of shares in a company, I understand that I'm not going to get all of that money.
> Of course, that's not a problem for me yet! :chuncky: and hopefully we won't see Canadian brokerage firms go belly up any time soon.


Probably a good subject for another thread as this seems to be farther and farther away from the topic at hand.

Returning to the original post - it's great that there is interest in the TFSA. It is important to understand that it's an account that depending on the specifics of the one setup, the possible investments can vary widely and the potential returns will also vary.

IMO, it's important to separate understanding the TFSA rules as these will be in effect, regardless of whether the TFSA opened allows only savings or allows just about any investment possible.


Also - if you like flexibility like I do, one can open multiple TFSA accounts (a common example - one savings account and one brokerage account for stocks etc.). The only change to the rules up thread is to point out that the TFSA contribution room applies to the individual, regardless of the number of TFSA accounts opened.


Cheers


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