This is why it makes sense to try to put your investments with a higher expected rate of return (ie equities) in your TFSA and things like bonds in the RRSP.

I’ve used my TFSA for frequent trading and am generally able to average about $100/day on my $14k balance. I don’t always make it, but I am quite certain that this will be possible as a conservative average once I hit $20k. Don’t know how successfully this can be scaled up, but I’ll give you an update in a year or so.

Assuming this is all valid, my point would be that the gains made would all capital in nature, but had it been in an RRSP, it would have been taxed at the max rate at withdrawal. In the TFSA, the entire growth (regardless of nature) is tax free, and in my humble opinion, makes it a superior vehicle (at least from a frequent trading perspective).

I would like to hear of any support or criticisms of this scenario. Have I overlooked anything obvious? Trading fees are fairly negligible at $0.01/share.

1. The people who make up the rules only benefit from them for a short peroid of time.

2. Taxing money in the future isn’t as good for the government as taxing it now. People in power now would probably prefer the money now rather than in 30 years when they are retired.

3. The above point is also true from an inflationary point of view. Look at the tax you can take on $5000 now vs. the tax you can take on that $5000 investment, even after it has grown over 30 years. If you’re getting an average of 5% on that investment it’d be worth about $22000 in 30 years. What do you think the tax rates would be on both of those figures would be based on the sccenario of RRSP vs. TFSA?

The way I see it, the government will probably do something like this:

a) Let everybody get used to the idea of having a TFSA, some or many will even make use of it.

b) Announce that they are phasing out the RRSP but because of their generous nature they will allow a portion, or maybe even all of your RRSP to be rolled into your TFSA, without a tax penalty.

People will jump at this because it’d be an incredible deal. Not having to pay taxes on your tax free dollars? Yes please! But then we’d have screwed it for the future generations and all RRSP contributions will now be TFSA contributions made with after tax dollars.

Maybe I’m just being paranoid and should break out my tin foil sombrero, but I have to ask myself this: “Why on earth would the Canadian government, one that is so fond of taxing it’s citizens to death, suddenly give us a tax free present?”

Non-registered accounts (and now TFSA) have always been a better choice for low income investing.

As I see it, if you put your money in RRSPs, sooner or later, you have to take it out to spend it. When you do, it counts as income and you pay taxes on it, and (this is the kicker) you get reduced benefits for all kinds of stuff because you’ve made “that much money.” For example, my 80 year old father gets $800 or so in pension, but another $550 or so in GAIN, because his pension is too small. If he took any money out of RRSPs, or whatever they had to be converted into, he’s loose the GAIN, and the subsidy for his Assisted Living place, and… (it’s a long list). So, he would have to take out probably over $10 or more per year before he had any extra money to spend. His effective taxes would be huge.

But, if I manage to put away $5k per year in this TFSP thing for the next 20 years, then I’ll have $100k (in today’s dollars, assuming the interest keeps up with inflation). But, the bonus is that I can take this out, or the interest earned on it, and spend it at any time without it being counted as income. I will continue to get whatever low-income subsidies that I manage to qualify for. I’d be technically poor, getting any available government assistance, but still have $100K in the bank, just for fun.

Sure, for people that intend to retire rich, RRSPs may make more sense. But, for us regular folk that will likely get income support in our old age, these TFSAs seem to make a whole lot of sense.