# TFSA play to increase your contribution room



## indexxx (Oct 31, 2011)

This is still possible, yes? Two links follow.

http://www.ftshares.com/flow-through/the-tfsa-swap-and-junior-stocks/

http://www.milliondollarjourney.com/tfsa-contribution-room.htm

So theoretically, if I hit some huge $50,000 gainer within my TFSA, withdraw that amount, and wait a year, I'll gain an extra $50,000 in contribution room and can transfer my entire portfolio into my TFSA. (assuming, of course, I find that magic stock in the first place...)

Nice


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## lakcaj (Jan 8, 2011)

Where's the increase - you take out 50,000 and are able to put the same 50,000 back in the next year. How is that different than just leaving the 50,000 in there?


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## Dibs (May 26, 2011)

This question got me wondering whether someone could use their TFSA to "invest" in a "company" that pays you $50,000 in "dividends". Then you withdraw the 50k and pay it back to the company, and keep the 50k in extra contribution room. What stops people from doing this?


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## Dmoney (Apr 28, 2011)

Not sure what you meant by "invest" in a "company".

Private corporation? Apparently you can invest in a canadian controlled private corporation (CCPC). I'm going to look into it for my parents, but it seems too good to be true.

For example, you might be able to buy in for a nominal amount ($100) and since you control the corporation, you could spit out dividends of $1000s of dollars tax free. In theory.

I can't see this being allowed but it's worth looking into.


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## Miser (Apr 24, 2011)

indexx
Thanxs for this great thread.
I always thought TFSA meant Take a Flyer Soon Aspossible
I am not very well versed in Swaps.
Anybody got anymore??


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## andrewf (Mar 1, 2010)

I think I did some digging on that question. If you do anything that CRA later deems not kosher, you will rue the day you hatched the plot. If it sounds like a tax avoidance scheme to you, chances are, CRA will agree.


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## Charlie (May 20, 2011)

edited -- not too sure if comments were valid -- sorry!


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## humble_pie (Jun 7, 2009)

swaps were banned from tfsas months after the plan was invented because of the abuse.

recently swaps have also been banned from rrsp & other reg'd accounts.

reason is the huge B/A spread in thinly-traded securities.

taxpayers god bless em kept trying to dance stuff into tfsa & rrsp at low "bid" prices.

then the next day they'd dance it out again at high "ask" prices, lol.

this scheme with the private corporation looks doable on paper, although i tend to doubt that shares of private corporations would be eligible tfsa investments. I'm keeping in mind that discount brokers will generally allow even less than the regulations permit, for the simple reason that they're discounters who run tight ships & they need to avoid any risk of litigation (insert Costa Concordia joke here.)


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## Charlie (May 20, 2011)

Was double checkin' my info when humble posted it much more succinctly than I would have. He's right on this. So the original scenario only works if you're aware of a pending 1000% gain that you will realize for cash. Good luck with that! 

(you can contribute from your non registered account 'in kind' but you can only take cash out).

The rules for private corps are exceedingly complicated. The starting point is that the family group cannot own more than 10%....and it continues from there. The penalties for getting it wrong are huge. Andrew's post is likely spot on...they're doing all they can to stop 'schemes.'


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## humble_pie (Jun 7, 2009)

& one has to remember that the discount brokers are the very opposite of cap'n schettino. The merest whiff that something might be a giglio salute & bang they won't allow it, even if the private cra rulings & the actual legislation-to-date perhaps permit it ...

(on a totally different topic) (sorry) (i have been trying to change my avatar for so long) (i got the new avatar halfway home but could not push it any further) (just this second i see that Frugal has Fixed Everything) ( !! ) (i am such a happy pie now)


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## Miser (Apr 24, 2011)

So I guess this is the best strategy.
From indexx URL

As a side note, the big banks are promoting the TFSA for interest and dividend income – THIS IS JUST PLAIN WRONG. This is in the banks best interest, not yours. The best use of a TFSA for an individual investor, in my opinion, is for your riskiest and most volatile stocks. Sure, you will not get to carry back capital losses, but in the case of the occasional 10 bagger there will be no taxes.


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## Charlie (May 20, 2011)

I think I'm wrong on 'in kind' withdrawals. SWAPs are not allowed (where you trade equal value stuff between accounts) but I think an in kind withdrawal from TFSA is OK. In theory. If your brokerage would allow it.


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## indexxx (Oct 31, 2011)

lakcaj said:


> Where's the increase - you take out 50,000 and are able to put the same 50,000 back in the next year. How is that different than just leaving the 50,000 in there?


-It's not about having a particular AMOUNT in the TFSA, it's about increasing the contribution room. Let's assume you had a bunch of holdings in a regular investment account at your bank that are worth five times your TFSA contribution room, but you'd love to shelter their future growth. Then assume that you got lucky and Jack's Magic Beans, which you bought 5000 shares of in your TFSA at $1.00, got bought out by Berkshire and your holdings climbed to $50,000. You, realizing that you'd made about as much as possible on that particular investment, could sell, and take that tax-free 50k for something, like startup cash or mortgage payoff or a small castle in Croatia. You could then move the rest of your taxable assets into your TFSA the next year, as the $50,000 is your new contribution room (plus $5,000 for that year's allowance). The result is that you have now tax-sheltered your entire portfolio.


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## CanadianCapitalist (Mar 31, 2009)

Dibs said:


> This question got me wondering whether someone could use their TFSA to "invest" in a "company" that pays you $50,000 in "dividends". Then you withdraw the 50k and pay it back to the company, and keep the 50k in extra contribution room. What stops people from doing this?





> For example, you might be able to buy in for a nominal amount ($100) and since you control the corporation, you could spit out dividends of $1000s of dollars tax free. In theory.


*You should definitely not even contemplate a transaction such as this*. CRA will consider the series of transactions as giving the holder an "advantage". The tax on advantage transactions is simple: 100%.

http://www.cra-arc.gc.ca/E/pbg/tf/rc298/rc298-11e.pdf


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## Dibs (May 26, 2011)

I'm glad that the CRA would be watching for it!


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## indexxx (Oct 31, 2011)

Yes, I was thinking of cash withdrawal, not swaps. So this idea is completely valid then, yes?


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## Miser (Apr 24, 2011)

We are confused?


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## CanadianCapitalist (Mar 31, 2009)

indexxx said:


> Yes, I was thinking of cash withdrawal, not swaps. So this idea is completely valid then, yes?


Yes. If you buy a qualified investment and hit the jackpot, then there is no problem with selling it, withdrawing cash from the TFSA and generating a large contribution room for future years.


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## Miser (Apr 24, 2011)

lakcaj said:


> Where's the increase - you take out 50,000 and are able to put the same 50,000 back in the next year. How is that different than just leaving the 50,000 in there?


This is where I am at.
You sell and take the cash and move other stocks in.
But you can only put in cash? So you have to sell them first...Capital gain.

You create room only....is this right?


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## doctrine (Sep 30, 2011)

You can buy CCPC shares, but you can't have companies that you control in your registered accounts. That includes TFSA's. They must be "arm's reach" away, which means that neither you nor someone close to you can control the CCPC in order for it to be a eligible investment. CRA spends a lot of time thinking about situations like this.


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## indexxx (Oct 31, 2011)

Miser said:


> This is where I am at.
> You sell and take the cash and move other stocks in.
> But you can only put in cash? So you have to sell them first...Capital gain.
> 
> You create room only....is this right?


From this page:

http://www.taxes.ca/info/tfsa.php

"For savvy investors who realize significant capital gains in these accounts, the best thing about the TFSA is that there is no tax on investment income, including capital gains!"


You might be thinking of a regular TFSA savings account through your bank etc that only allow you to buy GICs or have cash earning (low) interest. What I'm referring to is a TFSA brokerage account like through RBC direct Investing or Questrade etc. In these accounts, you can hold almost anything you want to invest in- stocks, ETFs, mutual funds, etc etc. You can do an in-kind transfer of existing securities.


@ Canadian Capitalist- Thanks, that is the point I was trying to clear up!


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## Soils4Peace (Mar 14, 2010)

*TCK.B $5k to $50k*

In January 2009, the first month, with the first $5000 available for tfsa contributions, TCK.B was around $5 per share. There was your 10-bagger, available on the very first trading day of the year.


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## Miser (Apr 24, 2011)

indexxx said:


> From this page:
> 
> http://www.taxes.ca/info/tfsa.php
> 
> ...


\

I have questrade but didn't know you could transfer stock into the account.
I thought you had to put in cash and buy the stock.
If you can tranfer stock, would it not be a "deemed disposition" for the tax man?
Hence nothing saved except brokerage costs for the trades.


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## CanadianCapitalist (Mar 31, 2009)

Miser said:


> If you can tranfer stock, would it not be a "deemed disposition" for the tax man?
> Hence nothing saved except brokerage costs for the trades.


Yes. And you have to be careful not to contribute in kind an asset that has a capital loss to a registered account.


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## Eclectic12 (Oct 20, 2010)

indexxx said:


> -It's not about having a particular AMOUNT in the TFSA, it's about increasing the contribution room.
> 
> Let's assume you had a bunch of holdings in a regular investment account at your bank that are worth five times your TFSA contribution room, [ ...]
> 
> ...


That's only part of the result so it is hard to tell how "good" or "bad" this works out.

The contribution "in-kind" of the taxable investments into the TFSA is a deemed disposition. Capital losses won't be allowed and capital gains will be triggered. So a key factor in this is how much capital gains tax is going to be generated by this process.

Then too, if the investments keep gaining value, this is a good move. If there is a market dive of say 20%, are you going to be happy knowing that you paid 20% more than you needed to in capital gains tax?


Finally - there's the question of how long it takes to get the growth within the TFSA. Losses are gone for good in the TFSA so if there are a lot of tries before hitting the 10 bagger, will there be any money left to grow? 

For example, if one turns TFSA room of $20K into $1K and then hits a 10 bagger there hasn't been a lot of progress.


I'm not saying it's impossible just that there's a lot of room for this scheme to go the wrong way.


Cheers


Cheers


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## indexxx (Oct 31, 2011)

Eclectic12 said:


> That's only part of the result so it is hard to tell how "good" or "bad" this works out.
> 
> The contribution "in-kind" of the taxable investments into the TFSA is a deemed disposition. Capital losses won't be allowed and capital gains will be triggered. So a key factor in this is how much capital gains tax is going to be generated by this process.
> 
> ...



The example of a 10-bagger was an exaggeration to illustrate the concept. It's more realistic to take out dividends or sell positions in something you feel has done its job for you and likely won't climb much higher- maybe you've realized 300% on something and pulling out will net you 15k. So it might be advantageous to withdraw that 15, thereby increasing your contribution room, and move some of your non-sheltered assets inside.

Yes, of course you'd pay CG taxes on a deemed disposition- but not as much as you'd pay when you eventually want to sell to reap your profit anyway, assuming continued growth. This "scheme" (which is not at all how I perceive it), is simply a method to increase your contribution room so that you can shelter further capital gains. So If I hold AAPL and expect a rise to $750/share, I might decide to do an in-kind transfer, pay the CG tax on my growth until now, (which I'd have to pay eventually anyway when I sell to collect the profit) and move the stock into my TFSA, thus saving any future CG taxes. 

There is always a chance that the market will dive 20%- in fact, it's even probable once per decade or so. But the recovery always happens eventually.


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## andrewf (Mar 1, 2010)

Whether you transfer in-kind or in cash is irrelevant, you get the same result, except perhaps some trading commissions.


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## Mall Guy (Sep 14, 2011)

Charlie said:


> I think I'm wrong on 'in kind' withdrawals. SWAPs are not allowed (where you trade equal value stuff between accounts) but I think an in kind withdrawal from TFSA is OK. In theory. If your brokerage would allow it.


I think it may already have been answered, but I know that RBC DI won't allow anything but cash withdrawal although I have done in kind deposits . . . well for now anyways. Then again, I find RBC DI pretty much afraid of their own shadow !


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## indexxx (Oct 31, 2011)

Mall Guy said:


> I think it may already have been answered, but I know that RBC DI won't allow anything but cash withdrawal although I have done in kind deposits . . . well for now anyways. Then again, I find RBC DI pretty much afraid of their own shadow !


RBC charges a $135.00 transfer fee. Better to sell and re-buy, and pay the transaction fee


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## Eclectic12 (Oct 20, 2010)

indexxx said:


> The example of a 10-bagger was an exaggeration to illustrate the concept. It's more realistic to take out dividends or sell positions in something you feel has done its job for you and likely won't climb much higher- [ ...]
> 
> Yes, of course you'd pay CG taxes on a deemed disposition- but not as much as you'd pay when you eventually want to sell to reap your profit anyway, assuming continued growth.
> 
> ...


Fair enough ... the original wording made it sound like a ten-bagger was expected on a regular basis. If one is able to do that on a regular basis, I wouldn't sweat the taxes part!

And yes, where there is continued growth, the overall CG will be less as long as one is correctly identifying which investments still have potential. 

This strategy will certainly shelter more CG, while one has a good candidate investment in a taxable account. If there isn't one, then likely it's better to just buy within the TFSA. 


Hmm ... 20% every decade or so? 

XIU which follows the TSE dropped in 2008 from $22 to $11 and then 2011 from $20 to $16 so there's been two in the last three years. I was quite happy in 2009 to move some of my taxable investments into my TFSA at the depressed levels for a depressed CG and a 10% income stream.


IAC, at the end of the day, my point is that like a lot of other strategies - make sure you know all of the ins/outs and choose wisely.


Cheers


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## Eclectic12 (Oct 20, 2010)

Miser said:


> [ ... ]
> 
> As a side note, the big banks are promoting the TFSA for interest and dividend income – THIS IS JUST PLAIN WRONG. This is in the banks best interest, not yours. The best use of a TFSA for an individual investor, in my opinion, is for your riskiest and most volatile stocks. Sure, you will not get to carry back capital losses, but in the case of the occasional 10 bagger there will be no taxes.


Sticking to what the financial institutions are promoting and ignoring other options is wrong. However, what's best for the individual investor varies, with a key part being their success rate.

If it takes the investor 16 tries to hit a 10 bagger, will there be enough left to make up for their losses? Within the TFSA, only growth and fresh contribution room will provide funds to try to make up lost ground.

Several people I know are over-confident in their investment choices and would lose 9 out of 10 investments while making a paltry 10% on the 10th. 


At the end the day, it's a tool in the investment toolbox that will make sense for some to use, some to dabble in and some to avoid.

Cheers


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