MoneySense magazine will be running a story on Canadians who have managed to grow their Tax-Free Savings Account (TFSA) contributions to $30,000, $40,000 or more (if you are interested in sharing your story, see details at the end of this post). The Financial Post also ran a series of stories on TFSA investors during the summer. That got me thinking: how would a passive investor who held Canadian stocks, bonds or REITs in her TFSA have fared assuming she made the maximum contribution on the first trading day of the calendar year. Also, assuming the TFSA investor is an Ontario resident, how much would she have saved in taxes?
Canadian Stocks in TFSA
If a TFSA investor had purchased iShares S&P/TSX 60 ETF (TSX: XIU) on the first trading of January for the entire TFSA contribution room plus the cash accumulated during the previous year, she would have a balance of approx. $30,000 as Sept. 18, 2013. Interestingly, all purchases except the first would have been made within a narrow trading band around the current price. Therefore, the bulk of the gains can be attributed to dividends and the 36 percent gain on the first $5,000 investment. Assuming the TFSA investor faces a 15 percent tax on eligible dividends from Canadian corporations, she is on track to save approx. $108 in taxes this year.
|Date of Purchase||XIU||# of shares||Dividends||Cash balance|| Tax Savings|
|2-Jan-09|| $13.60||366|| $0.43|| $168.68|| $23.44|
|4-Jan-10|| $17.55||659|| $0.45|| $310.45|| $44.09|
|4-Jan-11|| $19.43||931|| $0.44|| $427.92|| $61.86|
|3-Jan-12|| $17.33||1243|| $0.48|| $610.09|| $89.87|
|2-Jan-13|| $18.15||1579|| $0.30|| $481.70|| $72.00|
|Account Balance|| $29,772|| || || |
Canadian REITs in TFSA
Even though REITs are down approx. 10 percent YTD, they returned 17.0, 21.7, 22.6 and 55.3 percent respectively in the four years prior to 2013. Therefore, it shouldn’t be surprising that a TFSA investor in REITs would have turned a $25,500 investment into more than $36,000. The cash flow and tax savings are also adding up. The TFSA account is on track to accumulate distributions of $1,750 by the end of this year. Assuming 3/4ths of the distributions are taxed as capital gains and the rest as ordinary income at a rate of 30 percent, the TFSA account will deliver tax savings of $330 in 2013.
|Date of Purchase||XRE||# of shares||Distrib||Cash balance||Tax Savings|
|2-Jan-09|| $8.18||610|| $0.64|| $393.04|| $73.66|
|4-Jan-10|| $11.60||1074|| $0.68|| $733.11|| $137.34|
|4-Jan-11|| $13.45||1499|| $0.74|| $1,114.62|| $207.71|
|3-Jan-12|| $15.56||1891|| $0.75|| $1,413.89|| $264.15|
|2-Jan-13|| $17.24||2291|| $0.51|| $1,185.47|| $220.80|
|Account Balance|| $36,192|| || || |
Canadian Bonds in TFSA
Bonds are supposed to be low-risk, low-return investments and a TFSA account entirely invested in bonds would have grown to just about $28,400. Since the bulk of the returns from bonds is in the form of interest which is taxed as ordinary income, the TFSA account will earn interest of about $850 this year and generate tax savings of about $255.
|Date of Purchase|| XBB||# of shares|| Interest|| Cash balance|| Tax Savings|
|2-Jan-09|| $29.07||171|| $1.31|| $243.55|| $67.35|
|4-Jan-10|| $29.19||350|| $1.20|| $428.79|| $126.08|
|4-Jan-11|| $29.73||532|| $1.12|| $605.30|| $179.21|
|3-Jan-12|| $31.42||710|| $1.03|| $734.48|| $219.58|
|2-Jan-13|| $31.26||909|| $0.73|| $670.34|| $199.98|
|Account Balance|| $27,722|| || || |
The clear winner in the sweepstakes turn out to be REITs. The string of blockbuster returns could be attributed to the luck of the draw but the tax savings are substantial when compared to holding REITs in non-registered accounts. As an added bonus, by holding REITs in a registered account such as a TFSA, investors are also able to avoid the headache of tracking return of capital and reinvested distributions.
MoneySense Great TFSA Race
If you’re a successful TFSA investor, MoneySense magazine wants to hear your story. Just drop them a line at letters-at-moneysense-dot-ca or call 416-764-1435 with details of how much you have in your TFSA and what you did to get there.