Thursday, December 5, 2013

Tax-Free Savings Accounts – How TFSAs Can Make You Rich

The book Tax-Fee Savings Accounts – How TFSAs Can Make You Rich, by Gordon Pape, is a very useful guide to TFSAs. Broadly-speaking, the book contains two types of content: 1) easy-to-understand descriptions of the various TFSA rules and 2) advice for how to use a TFSA. The descriptions of the rules are excellent. The advice contains both good and bad parts.

This book is useful for financial novices as well as experts. I won’t discuss the material aimed at novices any further in this review. Instead I’ll discuss parts that I found interesting and parts where I disagreed.

Some Important Fine Points of TFSA Rules

“Never contribute a money-losing security directly to a TFSA. Sell it first, thereby creating a deductible capital loss, and then put the cash from the sale into the plan.” When you deposit stocks directly into a TFSA, the stocks are deemed to have been sold. You would have to pay capital gains taxes on any gains, but capital losses are not allowed.

You can’t “rent” TFSA room. Elaborate schemes using loans designed to allow one person to benefit from another person’s TFSA room are not permitted.

“Every dollar of income from [an RRSP or RRIF] reduces a Guaranteed Income Supplement benefit by 50 cents once the $3500 exemption has been exceeded.” This isn’t about TFSAs, but that $3500 exemption is important to factor into tax planning for low-income Canadians.

“Tax experts warn not to name your spouse/partner as a beneficiary but rather to use the successor holder designation” (except in Quebec). The important difference is whether the spouse gets to move the TFSA contents into his or her own TFSA without using up any of his or her own TFSA room.


My biggest criticism is Pape’s repeated statements showing a misunderstanding of the comparison between RRSPs and TFSAs. (I wrote about this in detail here and here.) No doubt Pape’s words will resonate with some people because over time they come to think of their RRSP assets as entirely their own, even though they received tax breaks in the past. The tax breaks enable people to contribute more money to an RRSP than they could contribute to a TFSA. Pape’s claim that RRSPs do not allow “us to obtain the full benefit of compounding” is simply not true. His advice to a 22-year old to “begin with an RRSP rather than a Tax-Free Savings Account because of the tax deduction” is bad advice if this young person’s income is low enough that the tax deduction is nearly worthless. Many young people are better off starting with a TFSA and waiting for higher income to open an RRSP.

Referring to a table of taxes paid on RRSP withdrawals, the figures “do not make provision for special tax treatment, such as the 50-percent capital gains rate.” I have no idea why capital gains taxes would be relevant to RRSP withdrawal income.

“Avoid speculative stocks and high-volatility mutual funds and exchange-traded funds.” There are so many types of ETFs that they couldn’t possibly be either all good or all bad. Further, Pape recommends certain ETFs at another point in the book.

Another category of concern I have about this book is the active investment advice. The book contains promotions of Pape’s subscription-based investment newsletters. Presumably, the tidbits of advice he gives are a sample of what’s in the newsletters. In one section he profiles a fictional couple who are savvy enough to “generate an average annual return of 15 percent on their money” for 30 years. In an environment of 2% to 3% inflation, this is unrealistic. Other advice to “choose companies that are industry leaders, have a well-established history of surviving even the toughest times, and are trading at the low end of their normal range” is just simplistic. Pape perpetuates the myth that individual investors who work hard can expect to beat the markets by a wide margin over extended periods of time.


The parts of this book that deal with TFSA rules and strategies are well written and easy to understand. Some parts of the advice offered are excellent as well, but other parts are misleading or just plain wrong.

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