Not pay trading income taxes through a TFSA trading account
RRSP contribution deadline on March 1st is fast approaching. Like most Canadians, this is pretty much the only time when I give myRegistered Retirement Savings Plan some attention. Right now, my RRSP balance stands at $0. That’s right, nothing. I’ve been putting my money at work for 10 years trading all sorts of markets but willfully ignoring the biggest cost to any trader. Taxes.
Now that my marginal tax rate is for the first time running above 30%, and with no tax break in sight, it’s time that I take a hard look at my tax strategies to reduce my trading costs. Don’t worry, this isn’t yet another post about RRSP. (But if you’re indeed looking for RRSP information, I point you to a Canadian personal finance blog, MillionDollarJourney)
The reason why I haven’t placed money into my RRSP is same as why I don’t invest in real estates. Which is, a lack of liquidity. As the name suggest, RRSP is for retirement. Here’s the problem simplistically put. If I take money out while I’m still working, I get taxed at my full marginal tax rate for those money. Even if they were supposed to be capital gain. Thus I effectively lose my 50% tax discount from my investment capital gain. So money into my RRSP would effectively be locked in while my salary is still my main source of income! I don’t have a wad of cash where I can just stash away yet. So that’s why my RRSP stands at $0 this year. Although I am thinking of opening an RRSP soon… But I digressed.
The fact is, taxes in Canada is ridiculously high. So I need to do something about it soon. While looking for RRSP information, I came across Questrade’s Tax Free Trading Account. It is a reincarnation of the Tax Free Savings Account. As far as I know, Questrade is the only discount broker offering this type of account. Basically, it is a trading account in which there is no income taxes involved and any profit taken out would not count towards annual income too. Sounds too good to be true?
Here are 3 limitations for a TFSA trading account.
- Limit of $5,000 contribution per year
- Extra costs for trading the U.S. markets
- Cash account only, no margin.
I will discuss #2 shortly.
But #3 is what matters the most to me as a trader. No margin means no leverage, no shorting, and no futures and forex trading.
No shorting?! One-way trading is not a good thing for a trader. This is obviously a ploy to get people to buy, buy, buy.
And no forex trading?!
Yet, I can’t expect to have my cake and eat it too. Yes, this TFSA trading thing has strings attached. But. It’s tax-free!
That’s enough incentive for me to consider incorporating it into my portfolio. Make no mistake, this will not be my primary, or even secondary, trading account. My plan is to use it as an ultra-conservative investment vehicle only. It’s about time that I replace my abysmal 1% yield savings account!
Beforeopening a Questrade TFSA trading account (affliate link) though, I need to do my homework on Canadian stocks. Because TFSA is a Canadian government offer, trading U.S. markets would incur extra costs (a devious way of “Buy Canadian”). As such, the only cost effective way for me to maximize a TFSA trading account is to trade TSX and TSX Ventures stocks.
This is yet another item on my to-do list. Come up with a strategy to trade this account with minimal risks (can’t stress this enough)using Canadian stocks. I actually have some ideas already. But I’ll save that for another time.
In my next series of posts, I ask a fundamental investment question like any trader should. Is a $5000 Questrade TFSA trading account cost effective?
P.S. For more information on Questrade, youngandthrifty.ca offers a review of this discount broker.
Related posts:
- Is a $5000 Questrade TFSA trading account cost effective? Part 4
- Is a $5000 Questrade TFSA trading account cost effective? – Part 1
- Is a $5000 Questrade TFSA trading account cost effective? Part 2
- Is a $5000 Questrade TFSA trading account cost effective? Part 3
- Considering investment options for my first RRSP
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- Is a $5000 Questrade TFSA trading account cost effective? – Part 2 | Quantisan.com - [...] series considered the costs of a TFSA trading account using data from my recent forex trading (forex trading is ...
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Thanks for the link!
Yes, Questrade IS the one and only that does the US funds. They seem to only ding you when you trade the US funds (actively). If you were funding the account with USD it takes about a week and a half to fund it (so buy the time you buy anything, the prices may have changed, so bear that in mind).
It does suck that there’s no margin and forex! =)
I think a lot of people this year (who are more “aggressive” than those who fill it in a High Interest Savings Account) have been filling it with Income Trusts… I did and it’s not been too bad though, but one will need to watch them closely because of the pending taxation on the companies come 2011.
Yes, there’s so much one can do to minimize taxes. But I like to live in my own little trading world and pretend all that doesn’t exist. At least until tax seasons comes. Like now.
I noticed you wrote about income trusts in TFSA too in your blog — Tax Free Trading Account (a “souped up†TFSA)
I don’t know much about income trusts but I’d imagine trading them would be similar to trading a high-yielding company (again, ignoring tax implications). Thus one would have to factor in the distributions in assessing the value of the trust. I think I’m just rambling now…
Actually, BMO Investorline also offers a self directed TFSA trading account. Even back in 2010. So other companies may offer them as well.