It Is Great To Be A Canadian Just Because Of TFSABy
The current Federal government of Canada created an interesting saving structure for Canadians that I think is the best invention ever from any democratic government. It was done several years ago and its value is now showing during this time of financial distress around the world. I like to explain what it is and urge everyone to convince their countries to do the same.
Tax Free Saving Account
TFSA is short form for Tax Free Saving Account. It is a simple mechanism allowing people to put away certain amount of money (capped to $5000 a year for now), after tax, every year ,from the time the person becomes an adult. This money can be used in various kinds of investments that is allowed by the government or just parked with a bank offering the account with interest. Any money made from the account is tax free. The money you make (and the money you lose) within the account is none of the government’s business.
The most common question asked.
Well, when you draw money out of the account to buy a house or to spend it on anything, of course sales tax and other tax related to the spending will hit you. And if you draw the money out to make an investment outside of the registered TFSA, the profit you gained will be taxable. Other then that, there is not much downside.
A Dream Comes True For All Traders
You can any time throw in as much money into your TFSA as the government allowed even if you have not done so for years. The cap is calculated based on what you are eligible to do, not when you first started doing it. For example, if you never contributed to the account for 10 years since you are eligible, you can put $50,000 into the TFSA account anytime, with no over contribution penalty because it part of the allowed amount.
An important distinction of TFSA is that it is not a tax deferring mechanism like the IRA in United States, RRSP in Canada, etc. Money you put into TFSA does not help you lower your tax bill. It is a pure equity protection tool.
Why I am talking about this so enthusiastically?
For people who do not trade for a living, this concept is nothing more than another way the banks and brokerages can charge you fees from the money you are putting aside.
For someone who knows how to trade, this concept is a way to profit from various markets totally tax free. And if you are good enough, you can accumulate a lot of profit, or, make a living, with no income tax consequence whatsoever, legally.
Currently, there are certain limitations on what you can trade, like leverage is not allowed in general. As a good trader, however, it is not really a problem. A good trader can always adapt and look for trading opportunities.
Time To Ask For That In Your Own Country
This saving concept is probably the best idea among all the things the Western governments have done in the past couple of decades. It protects the money that you already paid tax on and keep it that way. It preserves the idea that money should not be double taxed. It provides a floor for people to protect their wealth legally. It encourages people to save money legally as oppose to seek for ways to evade tax.
If your country does not have such a law in place, it is a good idea to ask for this being implemented in your country. Since Canada has already implemented the law, it is much easier to convince other governments to give it a try. Once a law like this is in place, it will be difficult if not impossible to reverse the path. So the earlier you can get your country to pass the law, the better it is for you.
Passing Down Your Trading Skills
My consideration is not just myself having part of my income being totally tax free. I am also thinking of ways to teach my kids to learn to trade in a controlled and encouraging environment. The TFSA simply offer the best incentive to the young ones to learn trading properly as every dollar you make in the account is tax free. Comparing that to the discouraging pay cheques they are going to get from their first jobs, where they will find a significant portion of their income already tax deducted, it can be a very good motivation.
If you think your government would never consider passing such a law in your country, maybe it is time to think about moving to Canada, eh?