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Peter's Political Blog

Tax Free Savings
Posted: Apr 03, 2008
Last seen: Jan 12, 2010

previous posting Economic Predictions Mar 12, 2008
next posting Snap Election Apr 12, 2008

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I must say, I like the TFS idea, in theory, and as a step to lowering the capital gains tax, it may just make sense.  However, I do see a problem.

First, although I am all for eliminating the CGT I am also a realist, and now just isn't the time.  We still have a 450 billion debt to pay off, and the Cons have already lost the surpluses the Liberals made, so the country needs the money at this time.

However, with proper money management, it may be a good time to start looking at possible solutions.  It will come as no surprise that I don't trust the Cons with budgeting, so I will just have to wait for the Liberals to take back power and see what their math tells them.

Back back to the problem I was mentioning.  As many homeowners are painfully aware that the interest on their mortgages is not tax deductible, but interest on other loans for investment purposes is.

So along comes Jan 1, 2009.  I go to the bank and take a $5000 loan which I put into a TFS account earning 5% (maybe GICs or a MF that pays dividents, etc).  Assuming my interest on the loan is 5%, I can withdraw my earnings, tax free, each month and pay the interest on my loan.

When tax time comes in 2010, I get a nice $250 deduction, sure not a fortune, but it adds up, and not at a constant $250 a year either as you may think.  Remember that any withdraws from my TFS can be replaced, so in 2010 I get a loan for $5250.  The power of compound interest is working for us, compounding our tax deduction each year, and so for the 2010 tax year I will have a $512.50 deduction, and it keeps growing from there.

In all likelyhood we can earn way more then 5% (or whatever rate we are paying in interest).  If we earn more we just withdraw that extra cash each year, and then replace it with a bigger loan.  The goal is to have 100% of your TFS account to be your loan... max out your loan, get the max tax deducation.

So let's take a look at what we just did:

  • The TFS account is not taxed because the money you put into it is already taxed, but in this case it is not, loans are not taxed.
  • Without paying a cent we get a free tax deduction
  • Assuming a very safe 5% return, after 10 years we get a $3144 tax deduction
  • After 20 years it is $8266 (or somewhere near a $3300 tax refund)
  • At 8% those numbers are $6221 and $11,440 (or $4575 refund)
  • After 20 years those tax refunds add up to $29,500 and $37,000 respective to a 5% and 8% return.

Of course you may be smart enough to say, "Peter, after 20 years you will have a $230,000 loan from the bank" and you would think that to be rather excessive.  Don't forget that is 20 years in the future.

Something to think about, something I'm sure the Cons didn't.

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