Blogs & Comment

A TFSA investing strategy

Most people will use the tax-free savings account (TFSA) to invest in conservative income investments such as high-interest saving accounts, but it appears Finance Minister Flaherty has also given daytraders and speculators a vehicle that many of them will be only too glad to use.
For signs of whats likely to come, check out what some financial advisors are recommending in the early going. They are suggesting risk-tolerant individuals use the self-directed version of a TFSA to go after the big score; they should take aggressive risks and trade highly volatile investments such as penny stocks, options, leveraged funds, etc. in hopes of shooting the lights out.
Thats because capital gains raise contribution room in a TFSA: if a $5,000 bet turns into $30,000, the latter amount can be sheltered from tax indefinitely or withdrawn tax free, leaving the TFSA with $30,000 in contribution room. Trading in a TFSA also incurs no taxes on capital gains. The downside: if the $5,000 goes to zero, contribution room is lost, as is the capital loss to claim for tax purposes.
Jamie Golombek, managing director of tax estate and planning at CIBC, is one of the financial advisers who have suggested this approach. So too has Norbert Schlenker, a financial advisor at Libra Investment Management. As he writes on the Financial Webring discussion forum:
There’s a feature of the TFSA that I think isn’t being taken into account here, namely that any growth in the account is a de facto permanent increase in cumulative contribution room. It’s a free option to escape taxability in perpetuity on a larger sum. might it be better to take a long shot, i.e. take a low percentage bet that will turn $5k into $50k (or $500k)?
Is this something good or another one of those unintended consequences of government programs?