Too late to sell before budget?

[no_free_lunch]

An enterprising lad need only get lucky on options a very few times - to do very well (& tax free), then use the proceeds (inside the account) to buy a portion of a property; anywhere in the world  ;) 4-5 accounts acting together to make the down-payment on a property being rented, & all it requires is that each TFSA holder have a valid Social Insurance Number.

 

SD are you suggesting that you can buy a property and hold it in within your TFSA?  I was under the impression you would need to withdraw out of the TFSA and hold the property out of the TFSA.  Any rent / capital gain would be taxed.  If there is some way to hold real estate in a TFSA I would like to know about that.

[Cardboard]

"Let’s see, if I’m working, I have the weekends, maybe, and a couple of hours every evening in which I spend money. But when if I am retired, essentially 100% of my time is leisure so I have 2 or 3 times the amount of time in which to spend money. And people think they will spend less money when they retire? That's like when I'm fully invested and the market tanks and my broker tries to tell me its really good news because its a 'buying opportunity'."

 

When you are retired, you normally don't have to pay for a mortgage, your car should put on less milleage, your kids are gone and the energy that you had at 30 or 40 years old is much less hence with it goes the appetite for partying, spending, etc. It is probably a generalistic way to see things but, I don't think it is too far from reality. If you are a saver at a young age, what are the odds that you will totally drop that habit as you get older and turn into a massive spender? 

 

Regarding OAS, I never counted on it. Nor CPP for that matter. If you save a lot, continue spending time on this website as you are, then your returns should be pretty satisfactory over time even if one day you decided to stop managing your own funds and go the index route. The pile should get really large in your accounts to take care of the rest without having to rely on government programs. Still believe that the RRSP should provide you with more wealth at the end for the same dollar saved vs non-registered accounts assuming that you are using the same investing method for both.

 

While I hear you regarding the treatment of capital gains vs say interest income, I think you need to think instead of how bad it would be if they were treated equivalent in non-registered accounts?

 

Cardboard 

[warrior]

To build a little on my previous RRSP post. The biggest drawback of an RRSP is not a situation when you draw a lot of money from the RRSP and loose some relatively small amount of OAS. The biggest drawback is the opposite. When you draw too little out of an RRSP and then upon death the whole amount becomes part of the terminal tax return and gets taxed all at once under a progressive tax system.

 

Now of anyone has any ideas of how to defray that risk I'm really, really interested.

 

explore "the RRSP/RRIF meltdown strategy", if you interested  PM  for more info .

[cwericb]

Another point. Should one decide to continue working while having a RIF in place, it is not a pretty picture.

 

Also, after retirement one might like to indulge themselves in a nicer vehicle(s), more travel and other 'luxuries' and hobbies one did not have the time to enjoy previously.

 

As far as reducing car expense is concerned, would you expect to spend your ‘golden years’ sitting around the house all day (or should I say ‘the home’) with the occasional trip to the grocery store in ‘Old Betsy”?

 

Have any of you  guys put thought into exactly what you would like to do after retirement? And what sort of budget do you see required for that lifestyle?

[Uccmal]

Interesting topic and great input from everyone. 

 

For Clarification:  The TFSA does not build up contribution room until the individual is 18. 

 

Sharper D.  Use options in your TFSA at your own risk, but you already know this.  My Wife's TFSA account is at break even due to using options (BAC).  Mine is up by 40% only, due to the same problem.  Had I stuck to conventional GARP value common stocks I would have been way further ahead in both accounts.  Options cause permanent loss when you goof up, and IMO are better suited to taxable accounts only.  JMO. 

 

RESPs are an interesting bird.  You can compound in them.  We are just at the point of people starting to collapse them.  If you have money left over after the education expenses, which we will, you can transfer it into your RRSP or RRIF, tax free.  I am starting to save room now in my wife's RRSP for that date.  If you cant do that then a certain portion becomes taxable.  God only knows how one determines capital gains in this type of situation.  The next few years should be instrcutive on how this will all play out.

 

OAS and CPP will be around but no one on this board will ever collect it.  I dont even put it in my calculations.  I just assume it will be taxed away which is fine.  Its meant as a minimum welfare payment for those less fortunate then us. 

[rb]

RESPs are an interesting bird.  You can compound in them.  We are just at the point of people starting to collapse them.  If you have money left over after the education expenses, which we will, you can transfer it into your RRSP or RRIF, tax free.  I am starting to save room now in my wife's RRSP for that date.  If you cant do that then a certain portion becomes taxable.  God only knows how one determines capital gains in this type of situation.  The next few years should be instrcutive on how this will all play out.

Al,

 

Each RESP has 2 accounts behind it for accounting purposes- a capital account and an income account. The capital account basically holds your original contributions and the income account holds your profits. Direct your broker to pay out the income account first. If you are left over with just capital contributions then there's no tax on that because they were taxed originally as income.

[SharperDingaan]

Yes TFSA accounts can be a bastard, when the recipients are < 18.

The way around it is to apply the contributions you would have made from age 1-17, to additional principal payment on the family mortgage. At 18 the recipient opens the TFSA, and the family makes the ongoing contributions out of the accumulate mortgage prepayments. The wizard and the recipient using the contribution as tuition towards ‘learning business’

 

Changing residency can also be a bastard.

It’s really just a cost of doing business, and in most cases not particularly high as the amount in the TFSA will not be extravagant. If it becomes extravagant, the recipient simply closes the account.   

 

Option use.

We’ve done well by options (Leaps), but agree that it’s generally the writer who benefits; hence our preference for cheap stock with high optionality, versus naked calls. To do well; you have to understand the business you are investing in, how to use payback period, and how to use risk.

 

A good example is PWT and the Jan-2018 calls. If you're pretty sure PWT will be > $3 by the end of the year, it's pretty hard to ignore the calls.

 

Houses in TFSA accounts.

Rental properties in a TFSA results in income tax paid being reimbursed, according to what proportion of the rental property the TFSA owns. Similarly if there’s a gain on sale, it’s tax free. 

 

SD

 

[rb]

Houses in TFSA accounts.

Rental properties in a TFSA results in income tax paid being reimbursed, according to what proportion of the rental property the TFSA owns. Similarly if there’s a gain on sale, it’s tax free. 

 

SD

Can you please elaborate a bit? I think the original question (as well as my current one) is how do you actually place the rental property in the tfsa account.

[Uccmal]

RESPs are an interesting bird.  You can compound in them.  We are just at the point of people starting to collapse them.  If you have money left over after the education expenses, which we will, you can transfer it into your RRSP or RRIF, tax free.  I am starting to save room now in my wife's RRSP for that date.  If you cant do that then a certain portion becomes taxable.  God only knows how one determines capital gains in this type of situation.  The next few years should be instrcutive on how this will all play out.

Al,

 

Each RESP has 2 accounts behind it for accounting purposes- a capital account and an income account. The capital account basically holds your original contributions and the income account holds your profits. Direct your broker to pay out the income account first. If you are left over with just capital contributions then there's no tax on that because they were taxed originally as income.

 

 

awesome Rb, I was actually trying to work this out a couple of weeks ago.  Tx. 

[rb]

To build a little on my previous RRSP post. The biggest drawback of an RRSP is not a situation when you draw a lot of money from the RRSP and loose some relatively small amount of OAS. The biggest drawback is the opposite. When you draw too little out of an RRSP and then upon death the whole amount becomes part of the terminal tax return and gets taxed all at once under a progressive tax system.

 

Now of anyone has any ideas of how to defray that risk I'm really, really interested.

 

explore "the RRSP/RRIF meltdown strategy", if you interested  PM  for more info .

I don't think the meltdown would work. To melt down $1 million in RRSP (kinda the amounts I'm working with) and 1.5%-2% margin interest one is looking at at truly staggering amounts of debt.

 

Any other ideas anyone?

[Cigarbutt]

For those interested in RESP accounts, maybe one way to look at them is to expect a +/- 70% penalty at the end of the road for the amounts left. Food for thought. Especially if you like snowballs.

Also, something that can be done and which is absolutely legal is that once an older child starts post high school education, the capital amount can be retired without losing the government grants. Then, if applicable and if you want, you can contribute the same amount retired to a younger child (in a family type account) and get the grants again. It's rare that the taxman lets you get away with this type of action but that's the way it is right now.

[SharperDingaan]

Houses in TFSA accounts.

Rental properties in a TFSA results in income tax paid being reimbursed, according to what proportion of the rental property the TFSA owns. Similarly if there’s a gain on sale, it’s tax free. 

 

SD

Can you please elaborate a bit? I think the original question (as well as my current one) is how do you actually place the rental property in the tfsa account.

 

Assume a rental property owned by a partnership of X entities, collectively contributing equity. The equity being the down payment on the property, & the rent on the property paying all costs. Assume that annual rent less all costs of ownership nets out to a nominal 1K/yr before tax (simplification).

 

Simplest is that the partnership creates a numbered company to buy the property, issues 100 shares, and each partner buys some of the shares of the numbered company. As long as the business of the numbered company qualifies, the TFSA is permitted to own shares in it; no different to owning the shares of a REIT (the numbered company is actually just a 'private' REIT).   

 

The rental property is sold, the numbered company wound up, and funds returned;

the gain on the investment held in the TFSA is tax free.

 

But if the controlling minds of the numbered company 'are in the business' (construction, agents, surveyors, wizards, etc.), it's highly unlikely it's going to lose money over the long haul.... If anything it's going to be used as a vehicle by which to train the next generation. All good. 

 

 

SD

 

 

[no_free_lunch]

SD, have you ever actually done this or seen it done?  I looked this up a bit and it sounds like you could buy a private company but you could not hold more than 10% of it.  So if you are married I guess you could hold 20% between the 2 of you but for quite a hassle.  You would have to find other investors for the remainder.  Even then it has to be "arms length" so it really limits your options.  I guess if you have a large family, over decades it could be worthwhile to set this up..  I just can't get over the thing about an arms length person running a private real estate company that you are investing in.  That just doesn't exist for me.

 

Wealthy clients should consider holding private company stock in TFSAs, since these investments are generally speculative and can yield huge gains.

 

The stock has to be shares of a specified small business corporation: generally a Canadian company that uses virtually all of its assets carrying on an active business in Canada.

 

But this strategy is off the table for any clients who own 10% or more of the company, or do business with it on a non-arm’s-length basis.

 

CRA defines people as dealing with each other at arm’s length when they’re not related. So people connected by blood relationship, marriage, common-law partnership or adoption are related and are disqualified from this definition.

 

Tax authorities also consider people who act together and have the same interests, such as those with close business ties, as not dealing with each other at arm’s length.

 

http://www.advisor.ca/tax/tax-news/up-the-risk-in-tfsas-108727

[SharperDingaan]

We have a version of this around some RRSP accounts.

The original concept came from some friends in the construction industry.

 

Imagine a family holding company, holding 95% ownerships in various separate ring fenced entities (local managers holding the rest). The manager keeps the place rented, repaired, etc. in return for 4-5% of the revenue, & a 1-2% equity stake. We now have an arms length person running a private real estate company that we're invested in, and the 'boots on the ground' ability to rent out a place almost anywhere in the world. Elegance. 

 

Agreed the TFSA isn't the most user friendly vehicle for investing in these entities, but 72 years (age 18 to death at 90) of totally tax free compounding is quite some prize. As most TFSA's also don't have much in them; the 10% threshold isn't a problem either.

 

Not for everyone, but nothing wrong with being ambitious!

 

SD