Archive for December, 2008

I  recently finished reading Andrea Mandel-Campbell’s book on Canada’s international competitiveness. It’s not a flattering view. A journalist,  Mandel-Campbell provides a well referenced view of the drivers and influences on the development of world class brands. She compares the experience of successful countries to that of Canada in the recent past but also traces the root causes of our marketing paralysis. I like that she interviews several Canadian businessmen to get their take. There is good discussion on framing the problems though not quite enough about prescriptions for  future improvement.  It seems to me  she acurately points out that government policy in this country will have to change from a mandate of redistribution of wealth to one of supporting the drivers of wealth creation.  For more information, you can visit the author’s website.

Background
In 2003 the Canadian Federal government agreed to investigate whether an  account would be a useful and appropriate way to help Canadians save more money. This undertaking eventually led to the introduction of the tax free savings account (TFSA) for 2009. It has borrowed from the Roth IRA in style and intent.

Rules For TFSA

Contributions are not tax deductible. You must be 18 years of age or older, a Canadian resident and be able to supply a valid social insurance number to participate. Initial contribution limits are $5,000.00 per year and will be indexed to inflation. Excess contributions will be taxed at 1% per month so this is something you really want to avoid. Unused contributions will be carried forward indefinitely. Contributions are not related to earned income. Any amounts withdrawn are added to the contribution room the following year.

Income and capital gain are not taxable while retained in a TFSA or when withdrawn. Income earned or amounts withdrawn will not be added to income tested benefits or credits delivered through the tax system. In addition these amounts will not effect OAS, GIS or Employment insurance benefits.

The qualified investments mirror RRSPs. Arms length entities such as stocks, bonds, mutual funds etc… . Small private shares may qualify subject to certain conditions. Interest on borrowed money to fund TFSA is not deductible., though a TSFA can be used as collateral for a loan.

No attribution rules apply so the TFSA will be used for income splitting purposes. The tax free status is lost at death though a tax free roll-over is possible if a spouse or common law partner is named as beneficiary.

Strategies

These flexible plans do not replace RSPs. They will be used most effectively in conjunction with pension type investments.  If you contribute a maximum to an RRSP and have savings outside that plan then the TFSA should be maximized.

Perhaps the best uses will be around family income splitting strategies. Parents or Grandparents can transfer up to $5,000. per year for each young adult or grandchild. Recipients can take the money out without tax and new room will be created for future savings.

This is also a welcome new vehicle for those who have high pension adjustments and have little use for RRSPs.

Other Notes

For young adults, a  tax return is required to build TFSA contribution room

Anti Avoidance rules apply to guard against transactions designed to shift taxable income to TSFA

This introduction will be supplemented by additional strategies in future posts.

Here are some timely videos. You may remember Henry Blodget in a previous role as an influential technology analyst. Ken French is  is the Carl E. and Catherine M. Heidt Professor of Finance at the Tuck School of Business at Dartmouth.  These three short  interviews cover the basis of our approach and cut through a good deal of noise in current internet driven investment opinion.

Stock Picking vs index

Timing the market

Commodities

I think increased regulation of the financial services is here to stay. We simply can’t afford another episode like our current financial turmoil. We need to ensure transparency. Back room (off balance sheet) deals need to be minimized, if not eliminated. The big but here is that care should be taken to ensure that entrepreneurs are given the latitude to re-energize the economies of the world. Bureaucratic institutions can’t be expected to be effective in that role. There should be a market discipline to the spending and hiring so that small business is not crowded out by large numbers coming out of governments.

Dan sullivan of the Strategic Coach has a definition of entrepreneurs as true creators of value. He quotes 19th century economist Jean-Baptiste Say: “An Entrepreneur is someone who takes resources from a lower level of productivity to a higher level of productivity.” I like this  definition becuase it speaks to the fundimental role of the entrepreneur as a creator of value for the economy.