# What do you think of a strategy of overcontributing to the TFSA?



## healey (Jun 1, 2009)

Penalty is 1%/month.

_Is it worthwhile? _

*I think it comes down to this:* if your tax savings (by having it in the TFSA) are greater than the cost of paying the 1% monthly penalty, then it's worthwhile! 
Myself, from some preliminary calculations, it's definitely looking like this would be worthwhile. 

Has anyone else on here done this?


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## Germack (Apr 4, 2009)

It is not worthwile at all.

Lets assume you over contribute $10000 and are lucky and have a rate of return of 10% or $1000 in a year.

Your tax savings are 1000*0.5 *50% tax rate = $250

Penalty is $100 per month *12 = $1200

Penalty >> Tax savings therefore it does not make anysense.


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## el oro (Jun 16, 2009)

Yes, it's worth it if your tax savings are greater than the 1% penalty.

So if you contribute the $10,000 and make 4.2% in a month you have $10,420. The 1% penalty would be $104.20 while tax would be $10,402*0.5*50%=$105.

So, in this simple example, if you can beat 4.2% per month or 64% per year then go for it.


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## CanadianCapitalist (Mar 31, 2009)

healey said:


> Penalty is 1%/month.
> 
> _Is it worthwhile? _


Definitely not, IMO. Precious few can consistently make more than 12% per year.


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## brad (May 22, 2009)

Not to mention the probability that this kind of deliberate gaming of the system is likely to trigger an audit. And if enough people try to beat the system they'll just increase the penalties until they provide enough of a disincentive.


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## canadianbanks (Jun 5, 2009)

I wouldn't do that, and as others said you need a really high return on your money to beat the penalty.


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## healey (Jun 1, 2009)

Thx for the replies guys!

For most people, I don't think this strategy would be profitable. I was thinking more for very active traders who spend a lot of time trading and who can _accumulate_ a lot of small profits. 

*Brad:* You raise a very important point--that doing this might increase one's probability of being audited. But, if one is declaring everything properly, then is there anything to worry about (besides the hassle)?


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## CuriousReader (Apr 3, 2009)

*hassle* - when dealing with anything related to government is usually A BIG PAIN


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## brad (May 22, 2009)

healey said:


> *Brad:* You raise a very important point--that doing this might increase one's probability of being audited. But, if one is declaring everything properly, then is there anything to worry about (besides the hassle)?


Nothing to worry about, but the hassle involved in an audit is non-trivial. Having been audited once I can say it's something I'd like to avoid ever having to go through again; it ate up many, many hours of my time.


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## healey (Jun 1, 2009)

thx Curious + Brad.
I've never been audited, but I tend to agree with you Curious!

*Brad:* on your audit, did the government bureaucrats find anything "wrong"? Like, I'm wondering if even "clean" audits take up gobs of time.


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## brad (May 22, 2009)

healey said:


> *Brad:* on your audit, did the government bureaucrats find anything "wrong"? Like, I'm wondering if even "clean" audits take up gobs of time.


Well, in my case it was a goof by my accountant, who thought I could take a tax deduction for my home office (I've been working at home since about 1992, first in the US and more recently from Canada), and while we thought we had a decent case for me taking the deduction I wasn't really entitled to it because I live here by choice -- in other words my employer didn't assign me to live in Montreal; I came here on my own volition. I've always worked remotely for this employer and my location doesn't matter (i'm a writer and editor, and don't need to be physically based at my company's office).

Anyway, they disallowed the deduction but it was only a few hundred bucks anyway. The real cost to me was the time and headache involved in gathering all the information they requested and all the documentation from my employer.


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## MoneyGal (Apr 24, 2009)

Clean audits take a lot of time, too. I had some pretty wild (and completely legitimate) income swings in the mid-1990s and two years were selected for review. 

Because I worked out of my home (and was unwilling to pay my accountant to use his space for these purposes) the auditor came to my house for about two weeks and essentially re-created my books from scratch for that time period. 

It was uncomfortable (in retrospect I would pay my accountant if I was audited again) because I had this person in my personal space. My accountant was also shocked that they didn't do a spot audit - they reviewed every single receipt claimed. (He said this must have been the most inexperienced auditor in the world.) 

In the end, they found no anomalies and no additional tax was owing (or refunded). They put that on paper and all was well.


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## ashby corner (Jun 15, 2009)

I'd like to figure out how to make 12% on ANYTHING!


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## brad (May 22, 2009)

ashby corner said:


> I'd like to figure out how to make 12% on ANYTHING!


While you have to sort of stand the notion of "investment" on its head to see it, investing in energy efficiency upgrades can give you really impressive returns (average of 16%, as high as 41%). This rather ancient graphic is out of date in terms of stock market returns, but the paybacks for energy efficiency investments are still valid:

http://hes.lbl.gov/hes/profitable.html

The basic deal is that you shell out some money up front for the energy efficiency improvements (e.g., efficient lights, efficient fridge, efficient washer, whatever), but the money you save in energy costs pays for the difference within a few years and from then on it's clear profit. The key is to make these decisions at the time you're going to have to replace your equipment anyway. If you just bought a new fridge last year you won't save money by replacing it with an Energy Star model this year. But if you have a 20-year-old fridge that's busted and you need a new one, spending a little more up front to buy an efficient model becomes an investment as your energy bills go down. Furthermore if you take your energy bill savings and invest them, your gains are even higher.


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## cardhu (May 26, 2009)

$1600 Gold by 2011 said:


> The 1% penalty would be $104.20 ...


Check your math.
The 1% penalty would be $100.00.


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## el oro (Jun 16, 2009)

THanks, checked the math. My mistake. The 1% penalty in that case would have been $50 since it's only a penalty on the overcontribution. That makes it somewhat better.


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## cardhu (May 26, 2009)

OK ... I assumed you were overcontributing by $10k, like the post just before yours did ... 

If you’re only overcontributing by $5k, then yes the monthly penalty would be only $50 ... versus $52.50 tax avoided (using your assumption of 4.2% monthly return and 50% marginal tax rate)

Of course, that mythical 50% marginal tax rate doesn’t exist, so in real life, you'd need higher returns to avoid that amount of tax ... at a 40% marginal rate, you'd need 80% annual returns, to avoid $50 tax, and at a 30% marginal rate, you'd need 117% annual returns to avoid $50 tax.


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## el oro (Jun 16, 2009)

cardhu said:


> Of course, that mythical 50% marginal tax rate doesn’t exist, so in real life, you'd need higher returns to avoid that amount of tax ... at a 40% marginal rate, you'd need 80% annual returns, to avoid $50 tax, and at a 30% marginal rate, you'd need 117% annual returns to avoid $50 tax.


You're right about that tax rate but it looks like you're assuming they take penalty from the overcontribution AND penalty from gains made on that overcontribution. Has that been confirmed somewhere?


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## Germack (Apr 4, 2009)

$1600 Gold by 2011 said:


> You're right about that tax rate but it looks like you're assuming they take penalty from the overcontribution AND penalty from gains made on that overcontribution. Has that been confirmed somewhere?


Who cares anyways. The penalty is so huge it does not make any sense. Who can achieve a return of > 50% per year?


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## cardhu (May 26, 2009)

$1600 Gold by 2011 said:


> ... it looks like you're assuming they take penalty from the overcontribution AND penalty from gains made on that overcontribution ...


No ... that was the mistake you made in your initial post ... and the reason I suggested you check your math ... the penalty applies to the overcontribution ONLY. 

The underlying premise of this silly maneouver is to shelter extra money from normal run-of-the-mill taxes ... or to “avoid” taxes in your taxable account ... if you’re paying $50 penalty to avoid $50 tax, then you’re just breaking even, and what’s the point of doing that? ... and if you have to generate returns of 117% per year just to get over that hump, then it’s a fantasy to suggest it could work. 



Germack said:


> Who cares anyways. The penalty is so huge it does not make any sense. Who can achieve a return of > 50% per year?


That is precisely the point.


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## cannon_fodder (Apr 3, 2009)

I'd be surprised if an institution would allow you to overcontribute unless you meant opening up separate accounts with different institutions.


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## mrmullen (Oct 13, 2009)

cardhu said:


> No ... that was the mistake you made in your initial post ... and the reason I suggested you check your math ... the penalty applies to the overcontribution ONLY.
> 
> The underlying premise of this silly maneouver is to shelter extra money from normal run-of-the-mill taxes ... or to “avoid” taxes in your taxable account ... if you’re paying $50 penalty to avoid $50 tax, then you’re just breaking even, and what’s the point of doing that? ... and if you have to generate returns of 117% per year just to get over that hump, then it’s a fantasy to suggest it could work.
> 
> ...


How is this not worth my while then? I easily make more then 50% return day trading. You're saying that I can put 1 million into my TFSA, pay 10,000 grand a month penalty and the penalties don't apply to the earnings.

If that is the case I am way ahead just paying the penalty.

Scenario 1

Contribute 1,000,000
Return 50%

Gross of 500,000
Penalties 120,000 (maybe slightly more if they compound it)
Left in TFSA 380,000

And ALL FUTURE EARNINGS of this 380,000 is tax free. After the first year I pull out the million to avoid future penalties (or maybe leave it in and build it higher)

Scenario 2

Start with 1,000,000
Return 50%

Gross of 500,000
Tax of 42.7% 213,500 (because I day trade it all is income taxed)
Left after 286,500

And ALL FUTURE EARNINGS of this 286,500 is TAXED.


So it seems like a no brainer. I know people will say that 50% is not realistic, etc... but I have been WELL north of this mark for 4 years solid and don't see it changing. For fun though I ran the numbers and you could go as low as a return of 28% and still come out ahead in the tax bracket I used.

The only flaw I see is the CRA coming after you with GAR, but I don't know if they would, I am paying the penalty.


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## Canadian CC (Oct 14, 2009)

If you think you can average more than 12% yield per year, then you should leave the project of investing in a TFSA and apply on a portfolio manager position! Nobody can average such high yield on a steady basis (unless your last name is Buffett).

it's impossible to pay the penalty and make money with it!


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## mrmullen (Oct 13, 2009)

Canadian CC said:


> If you think you can average more than 12% yield per year, then you should leave the project of investing in a TFSA and apply on a portfolio manager position! Nobody can average such high yield on a steady basis (unless your last name is Buffett).
> 
> it's impossible to pay the penalty and make money with it!


Over 12% is effortless day trading for a living. I have been doing it for quite a few years and never been less then 60%. There is no mutual fund that will take on high risk day trading like I do, and I don't think I would make as much anyway.

The problem seems to be finding and institution that will knowingly let me over contribute. They won't take a cheque for 1 million even if I say I will pay the penalty. I think the penalty is more for if you have multiple TFSA's and accidentally go over your limit by contributing too much between them. Not for knowingly throwing down 1 million.


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## pantograph (Apr 6, 2009)

I can't see why you would bother with a TSFA if you can make that kind of money consistenly. Move to the Turks and Caicos instead.


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## OhGreatGuru (May 24, 2009)

The Minister of Finance is going to close this little loophole.

http://www.theglobeandmail.com/repo...-of-tax-free-savings-accounts/article1329844/


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## healey (Jun 1, 2009)

Thx for that Ohgreatguru. What an *** Flaherty is. All savings should be taxed free. It's called freedom to keep your own property. 

Government is coercion. I'm reminded of the words of H.L. Mencken: 

_"I believe that all government is evil in that all government must necessarily make war upon liberty."_ - H.L. Mencken


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## OhGreatGuru (May 24, 2009)

healey said:


> Thx for that Ohgreatguru. What an *** Flaherty is. All savings should be taxed free. It's called freedom to keep your own property.


Interesting social policy position. The wealthy would never pay any taxes. They would just sit back and collect their tax-free dividends.


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## healey (Jun 1, 2009)

Ya, I'm an anarcho-capitalist. I'm a very staunch defender of human liberty. If you want to learn more about it, LewRockwell.com and Mises.org are very good sites.

Yes, the wealthy, and the poor, _and everybody else_ would pay not any taxes if there was a truly free-society!


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## bgc_fan (Apr 5, 2009)

healey said:


> Yes, the wealthy, and the poor, _and everybody else_ would pay not any taxes if there was a truly free-society!


That's an interesting thought. I'm kind of curious on who pays for police, firefighters, educators, the army, infrastructure, etc in this sort of tax-free society.


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## Rickson9 (Apr 9, 2009)

bgc_fan said:


> That's an interesting thought. I'm kind of curious on who pays for police, firefighters, educators, the army, infrastructure, etc in this sort of tax-free society.


The United Federation of Planets.


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## PMREdmonton (Apr 6, 2009)

bgc_fan said:


> That's an interesting thought. I'm kind of curious on who pays for police, firefighters, educators, the army, infrastructure, etc in this sort of tax-free society.


Obviously, no infrastructure for public use. It will all be pay for use like tolls.

No need for an army since there are no nation states. 

Every man for himself so no need for pulically paid institutions like police, firefighting, health care, education, etc. With all the tax savings, you are free to purchase all these items privately from independent contractors.


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## CuriousReader (Apr 3, 2009)

PMREdmonton said:


> Obviously, no infrastructure for public use. It will all be pay for use like tolls.
> 
> No need for an army since there are no nation states.
> 
> Every man for himself so no need for pulically paid institutions like police, firefighting, health care, education, etc. With all the tax savings, you are free to purchase all these items privately from independent contractors.


I have more than once stated my dislike on taxes and government waste of money, but having a no-tax system is probably taking it a bit too far.

I can understand no free health care or education, but how's a society supposed to live without any police or fire services? "Every man for himself" sounds similar like a barbaric society where there's no law and order and if I want take something from someone by force, I am free to do so as in the end it will depend literally on survival of the fittest.

How can this kind of society be viable?


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## healey (Jun 1, 2009)

Curiousreader: there would be fire and police services. Just the method of payment would be different. 

Right now they are collected (if resisted sufficiently) via the barrel of a gun. In a free society they would be funded like people fund private businesses--by individuals _voluntarily_ deciding to purchase their goods and or services.


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## Berubeland (Sep 6, 2009)

I think there might be a few kinks to work out. 

My opinion is that for certain things the government is pretty good at. Fire, Police, Bridges, Roads, and certainly health care. Car insurance too is a lot cheaper where it's available.

I have worked a lot for these corporate guys I'm not really comfortable with them monetizing my heart attack or rape for that matter. 

So as irritated as i get with the waste the alternative is much grimmer.


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## Robillard (Apr 11, 2009)

healey is right about the method for payment for firefighting being different if government didn't do it. In the dying days of the Roman Republic, there was public no fire fighting service. One of Rome's wealthiest citizens, Marcus Licinius Crassus (of the first triumvirate) organized a private firefighting service. As you might expect, Crassus's men would put out your house fire for a price. Typically the price was the property itself. 

The problem with PMREdmonton's earlier point about a society in which the provision of all services is entirely private is that certain services are non-rivalrous and non-excludable. Furthermore, not all services are entirely for private benefit. Some have positive externalities when provided, or conversely, there are negative externalities when they are not provided. If you own a house, and your neighbour's house catches fire, would you not benefit if that fire was put out? Forget about your house catching fire, just think about the effect on property values! If the provision of fire protection were entirely private, and the fire fighters could extract payment from everyone who benefitted from the fire being put out, then everyone in the neighbourhood would pay up. Wait a minute, that sounds a lot like a tax! If the people in the neighbourhood don't pay for it, when they are all free riders benefitting from the firefighting services sold to the poor sap whose house is on fire. 

There is another example of the private provision of firefighting going very wrong. Is anyone familiar with the film, the Gangs of New York? At one point in the movie, we see a house on fire, and two fire fighting crews show up to put out the fire. The first one there put a barrel over the fire hydrant that was to be used by the other crew. Then instead of putting out the fire, the fire crews fight hand-to-hand over who would have the privilege of putting out the fire (and possibly extracting payment from the property owner).


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## CuriousReader (Apr 3, 2009)

healey said:


> Curiousreader: there would be fire and police services. Just the method of payment would be different.
> 
> Right now they are collected (if resisted sufficiently) via the barrel of a gun. In a free society they would be funded like people fund private businesses--by individuals _voluntarily_ deciding to purchase their goods and or services.


If police force is funded independently to provide security, in the end the society will become a mafia-like society where the one with enough wealth to pay their own security force will provide security in their own interest. Same goes for firemen, there isnt much difference between losing your house to fire (but still own the land), or get the fire out (but losing your ownership).


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