PORTFOLIO STRATEGY
New tax-free account means there's planning ahead
Rob Carrick's ideas for managing your investments
Headshot of Rob Carrick
ROB CARRICK
March 1, 2008
In the financial world, people who use savings accounts, guaranteed investment certificates and bonds are second-class citizens.
The Tax-Free Savings Account introduced in the federal budget this week goes a long way toward eliminating this bias. For many people, this will be the new program's chief benefit when it kicks in starting in 2009.
From a tax point of view, there is no distinction between money earned through salary and the interest paid by GICs and the like. Dividends and capital gains both get special treatment that allows their after-tax returns to crush those from anything paying interest.
TFSAs are an investing equalizer. No matter what you put in it, and you can invest in all the same things as you can with an RRSP, you don't pay tax on your gains. Nor is there any tax to pay when you withdraw money from a plan.
The Globe and Mail
All of this highlights the fact that investors have some planning to do in the lead-up to the introduction of this new program next year (the usual proviso for minority governments applies, of course). To start with, TFSAs are ideal for interest-paying savings and investments.
If all your investments are tied up in your registered retirement savings and education plans, then a TFSA will be a perfect receptacle for your short-term savings and emergency funds. You'll want to use a high-interest savings account from the likes of President's Choice Financial, ING Direct, Manulife Financial, ICICI Bank of Canada, Royal Bank of Canada, Bank of Nova Scotia, Citizens Bank of Canada, Canadian Tire Bank and more. Regular bank savings accounts are pointless in this or any other application because they pay only trace amounts of interest at best.
Critics of the TFSA point out that the tax benefits are small if you use even high-interest accounts for savings. An Alberta resident who earns $75,000 a year might pay all of $72 in tax on $5,000 invested a 4-per-cent high-rate savings account for a year. Still, it's a no-brainer to use a TFSA to protect that $72.
People with investments outside their registered plans need to think strategically about how they'll use TFSAs. Again, though, interest-paying investments look like a top candidate for inclusion in these plans.
On reading the budget this week, Kevin Dancey, president and CEO of the Canadian Institute of Chartered Accountants, immediately singled out strip bonds as being an ideal TFSA investment. Strips are bought at a discount to their value at maturity, and the differential is computed into an annualized yield. You don't actually get the usual interest payments each year with a strip, but you'll pay tax as if you did. Not in a TFSA, though.
David Shymko, a financial adviser in Vancouver with Macdonald, Shymko & Co., said he sees TFSAs primarily as a tool collecting interest income. "Dividends would be wasted in there, just as they're wasted in registered accounts."
A well-hidden budget provision will slightly raise personal income tax rates on dividends starting in 2010, but your marginal tax rate on dividends (that's the tax rate on your last dollar earned) can in some cases be much less than half of what it is for interest income.
TFSAs and investing for dividends and capital gains aren't necessarily incompatible, however. It all depends on how extensive your non-registered investments are. If you have a large, diversified portfolio, you'll want to keep interest-paying investments in the TFSA and your stocks outside. If you have small non-registered holdings, it can make sense to consolidate in a TFSA and let the portfolio ride for the long term. When you finally get around to withdrawing funds from your plan, the taxes you avoid could be significant. Quite likely, they'd outweigh the benefits of using a TFSA for interest-paying investments only.
The most notable feature of the TFSA may be its utility for virtually every demographic above the age of 18. For example, seniors are expected to be avid users. First, they'll be able to save or invest any surplus funds from their registered retirement income fund withdrawals in a tax-sheltered format. Second, any money they pull out of a TFSA won't affect their income in a way that negatively affects their eligibility to receive Old Age Security and other government benefits.
There are a couple of tax wrinkles with TFSAs that will lessen their appeal to aggressive stock traders.
In a conventional investment account, you can get some use out of your dud stocks by applying losses against taxable capital gains. Capital losses in a TFSA are wasted. There's also no point in using borrowed money to invest in a TFSA because you won't be able to deduct interest costs like you can in a regular investment account.
Investors with existing non-registered savings and investments may be wondering how they can get these assets into a TFSA. If you transfer stocks or mutual funds over, it's considered a sale and you'll be liable for taxes on any applicable capital gains. GICs will be tricky because they're not a liquid asset.
"We honestly haven't gone into those kinds of issues yet," said Linda Knight, president of BMO Mutual Funds. "The reality is, people who have non-registered savings and investments now are going to want to use this vehicle. So we'll look at how to make that transfer as advantageous and easy as possible."
Another issue that still needs to be resolved is whether financial institutions will charge annual administration fees on TFSAs, just as they do with RRSP and RESPs. "Even if they get $10 or $15 registration fees, this will be a nice program for the banks, or other financial institutions," Mr. Shymko said.
Regardless of how you plan to use a TFSA, don't open one before you check the fees. There are bound to be some no-fee TFSAs offered and they're the ones that will be most attractive.
Taxes and the TFSA
Starting in 2009, the new Tax-Free Savings Account will allow you to invest $5,000 a year without paying taxes on your gains or your withdrawals. What investments should go in a TFSA? One way to decide is to look at how much of a benefit you'll get from the tax sheltering provided by a TFSA.
Marginal tax rates on investment income ('07 tax year)
TFSA Non-Registered (%)
B.C. resident making $50,000 per year
Interest income 0 30.7
Dividend income* 0 4.4
Capital gains 0 15.3
Ontario resident making $100,000 per year
Interest income 0 43.4
Dividend income* 0 20.3
Capital gains 0 21.7
Nova Scotia resident making $150,000 per year
Interest income 0 48.3
Dividend income* 0 28.4
Capital gains 0 24.1
*applies to eligible dividends paid by corporations; also, taxes on dividends will rise slightly starting in 2010
SOURCE: ERNST & YOUNG TAX'S ONLINE 2007 PERSONAL TAX CALCULATOR
*****
TFSA ABCs
Basic concept: A vehicle for tax-free savings and investment available to anyone 18 and older.
Start date: 2009
limits: $5,000 per year to start.
Tax on gains: Nil
Tax on Withdrawals: Nil
Deductions: Nil
Unused Contribution: Available to carry forward.
Funds Taken Out: Withdrawals are added back to your total contribution room.
Allowable Investments: Same as RRSPs, which means stocks, bonds, funds and savings accounts.
Saturday, March 1, 2008
New tax-free account means there's planning ahead
Friday, February 29, 2008
Markets RED RED RED - BWR.wt down 20% Haircut
Move your money out as I did...Here is a quick alternate nickel stock, .60 cents down from the high of 1.98 but a smaller float, TSX based , has bottomed and is moving back up, Canadian producing mine and lots of money and potential to double or triple this year.
down from the high, but has a double bottom bounce up happening.
Check this out click the link
Thursday, February 28, 2008
Jennings Confirms Target PDP:TSX $17.40
DrillingThe well is created by drilling a hole 5 to 30 inches (13 – 76 cm) diameter into the earth with an oil platform which rotates a drill bit. After the hole is drilled, a steel pipe (casing) slightly smaller than the hole is placed in the hole, and secured with cement. The casing provides structural integrity to the newly drilled wellbore in addition to isolating potentially dangerous high pressure zones from each other and from the surface.With these zones safely isolated and the formation protected by the casing, the well can be drilled deeper (into potentially more-unstable and violent formations) with a smaller bit, and also cased with a smaller size casing. Modern wells often have 2-5 sets of subsequently smaller hole sizes drilled inside one another, each cemented with casing.
Crude surges past $102 a barrel
JOHN WILEN
Thursday, February 28, 2008
NEW YORK — Crude prices rebounded Thursday, shooting up more than $2 (U.S.) a barrel to a new record as a falling U.S. dollar and the prospect of lower interest rates attracted fresh money to the oil market.
U.S. retail gasoline prices, meanwhile, rose closer to records above $3 a gallon.
A pair of dismal economic reports Thursday drew more money into the oil market, as did Federal Reserve Chairman Ben Bernanke's comments that the economy is not immediately threatened with stagflation, a combination of economic weakness and rising inflation.
The Commerce Department said gross domestic product grew at only a 0.6 per cent rate in the fourth quarter, below estimates and at only a fraction of the previous quarter's growth rate, while the Labour Department said applications for unemployment benefits rose by 19,000 last week, more than expected.
Rather than viewing such news as bad for oil demand, investors chose to see it as confirmation of their beliefs that the Fed will continue cutting interest rates to try to shore up the economy. Interest rate cuts tend to weaken the U.S. dollar, and crude futures offer a hedge against a falling dollar. Also, oil futures bought and sold in dollars are more attractive to foreign investors when the greenback is falling.
“I really think that this is oil being viewed as ... a financial instrument,” said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago.
Light, sweet crude for April delivery rose $2.45 to $102.09 a barrel on the New York Mercantile Exchange after rising to a new record of $102.74.
Crude prices are within the range of inflation-adjusted highs set in early 1980. A $38 barrel of oil then would be worth $97 to $104 or more today, depending on the how the adjustment is calculated. A direct comparison with daily Nymex prices is difficult because historical data, gathered before the crude futures contract was created in 1983, are based on average monthly prices posted by oil producers.
Different analysts have varying benchmarks for an inflation adjusted high. For example, John Kingston, director of oil at Platts, the energy research arm of McGraw-Hill Cos., arrived at an all-time high of more than $104 a barrel, which he said adjusts for delivery costs to and from Cushing, Okla., the Nymex crude oil delivery terminal. Using his own inflation adjustment, A. G. Edwards & Sons, Inc. oil analyst Eric Wittenauer arrived at a widely quoted estimate of $103.76.
However, an inflation calculator maintained by the Bureau of Labour Statistics estimates that $38 in 1980 is worth $97.34 today. A Federal Reserve Bank of Minneapolis calculator puts $38 in 1980 dollars at $99.43 today.
Oil's rally is pulling gas prices higher. At the pump, retail gasoline prices rose 0.9 cent overnight to a national average of $3.161 a gallon, according to AAA and the Oil Price Information Service. Prices are within 7 cents of May's record of $3.227 a gallon. The Energy Department expects prices to peak near $3.40 a gallon this spring; many analysts think prices will rise much higher than that.
Oil prices fell $1.24 a barrel Wednesday after the Energy Department reported crude inventories rose more than expected last week.
But that reflected a rare reaction by oil investors to supply and demand fundamentals. Oil prices have been far more affected in recent months by dollar- and interest rate-driven investment decisions, analysts say.
“[Fundamentals] have no relationship to price right now,” Mr. Flynn said. If prices were responding to supply and demand, fundamentals, they would be falling, he said. Several recent forecasters have lowered oil demand growth predictions for this year due to the slowing economy, and domestic oil inventories have been growing.
Oil prices have received some support in recent days from word of a technical glitch that temporarily disrupted the flow of a small amount of crude out of Nigeria. Eni SpA denied earlier reports that its Brass River oil terminal had been attacked by rebels. Turkey's recent invasion of Northern Iraq in search of Kurdish rebels has also been supportive, Mr. Flynn said, but these stories are not enough in and of themselves to explain why oil continues to trade above $100.
Many analysts believe it's just a matter of time until the fundamentals reassert themselves on the market, pushing prices down.
Other energy futures also rose Thursday. March gasoline futures rose 0.94 cent to $2.4871 a gallon on the Nymex, while March heating oil futures rose 6.23 cents to $2.8334 a gallon.
April natural gas futures jumped 41.3 cents to $9.473 per 1,000 cubic feet. The Energy Department said inventories fell by 151 billion cubic feet last week, slightly less than expected.
In London, April Brent crude rose $2.18 to $100.45 a barrel on the ICE Futures exchange.
© Copyright The Globe and Mail
JOHN WILEN
Thursday, February 28, 2008
NEW YORK — Crude prices rebounded Thursday, shooting up more than $2 (U.S.) a barrel to a new record as a falling U.S. dollar and the prospect of lower interest rates attracted fresh money to the oil market.
U.S. retail gasoline prices, meanwhile, rose closer to records above $3 a gallon.
A pair of dismal economic reports Thursday drew more money into the oil market, as did Federal Reserve Chairman Ben Bernanke's comments that the economy is not immediately threatened with stagflation, a combination of economic weakness and rising inflation.
The Commerce Department said gross domestic product grew at only a 0.6 per cent rate in the fourth quarter, below estimates and at only a fraction of the previous quarter's growth rate, while the Labour Department said applications for unemployment benefits rose by 19,000 last week, more than expected.
Rather than viewing such news as bad for oil demand, investors chose to see it as confirmation of their beliefs that the Fed will continue cutting interest rates to try to shore up the economy. Interest rate cuts tend to weaken the U.S. dollar, and crude futures offer a hedge against a falling dollar. Also, oil futures bought and sold in dollars are more attractive to foreign investors when the greenback is falling.
“I really think that this is oil being viewed as ... a financial instrument,” said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago.
Light, sweet crude for April delivery rose $2.45 to $102.09 a barrel on the New York Mercantile Exchange after rising to a new record of $102.74.
Crude prices are within the range of inflation-adjusted highs set in early 1980. A $38 barrel of oil then would be worth $97 to $104 or more today, depending on the how the adjustment is calculated. A direct comparison with daily Nymex prices is difficult because historical data, gathered before the crude futures contract was created in 1983, are based on average monthly prices posted by oil producers.
Different analysts have varying benchmarks for an inflation adjusted high. For example, John Kingston, director of oil at Platts, the energy research arm of McGraw-Hill Cos., arrived at an all-time high of more than $104 a barrel, which he said adjusts for delivery costs to and from Cushing, Okla., the Nymex crude oil delivery terminal. Using his own inflation adjustment, A. G. Edwards & Sons, Inc. oil analyst Eric Wittenauer arrived at a widely quoted estimate of $103.76.
However, an inflation calculator maintained by the Bureau of Labour Statistics estimates that $38 in 1980 is worth $97.34 today. A Federal Reserve Bank of Minneapolis calculator puts $38 in 1980 dollars at $99.43 today.
Oil's rally is pulling gas prices higher. At the pump, retail gasoline prices rose 0.9 cent overnight to a national average of $3.161 a gallon, according to AAA and the Oil Price Information Service. Prices are within 7 cents of May's record of $3.227 a gallon. The Energy Department expects prices to peak near $3.40 a gallon this spring; many analysts think prices will rise much higher than that.
Oil prices fell $1.24 a barrel Wednesday after the Energy Department reported crude inventories rose more than expected last week.
But that reflected a rare reaction by oil investors to supply and demand fundamentals. Oil prices have been far more affected in recent months by dollar- and interest rate-driven investment decisions, analysts say.
“[Fundamentals] have no relationship to price right now,” Mr. Flynn said. If prices were responding to supply and demand, fundamentals, they would be falling, he said. Several recent forecasters have lowered oil demand growth predictions for this year due to the slowing economy, and domestic oil inventories have been growing.
Oil prices have received some support in recent days from word of a technical glitch that temporarily disrupted the flow of a small amount of crude out of Nigeria. Eni SpA denied earlier reports that its Brass River oil terminal had been attacked by rebels. Turkey's recent invasion of Northern Iraq in search of Kurdish rebels has also been supportive, Mr. Flynn said, but these stories are not enough in and of themselves to explain why oil continues to trade above $100.
Many analysts believe it's just a matter of time until the fundamentals reassert themselves on the market, pushing prices down.
Other energy futures also rose Thursday. March gasoline futures rose 0.94 cent to $2.4871 a gallon on the Nymex, while March heating oil futures rose 6.23 cents to $2.8334 a gallon.
April natural gas futures jumped 41.3 cents to $9.473 per 1,000 cubic feet. The Energy Department said inventories fell by 151 billion cubic feet last week, slightly less than expected.
In London, April Brent crude rose $2.18 to $100.45 a barrel on the ICE Futures exchange.
© Copyright The Globe and Mail
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