Saturday, June 12, 2010

TFSA Hidden Charges More Costly Than The Benefits...

As the old saying goes, if something seems too good to be true, it probably is... And that's what many Canadians are finding out with their supposedly "Tax-Free" Savings Accounts.

Though the Government of Canada on their TFSA website ( uses words/phrases like "Flexible", "Tax-Free Withdrawals" and "Access" (as shown in the screenshot from the website above), they really should have used phrases like "Hidden Fees", "Read The Fine Print" and "Harsh Penalties"...

You see, TFSAs are great if you plan on putting money in there, and never using it. But, if you do ever need to use the money, like for an emergency for example (which we were always suppose to be able to do), or if you want to transfer your TFSA from one Bank to another, be prepared to get hit with large hidden fees, if you're not careful.

Here's the story from the Toronto Star:

Roseman: Taxpayers hit with penalties on tax-free savings accounts
Many Canadians who opened a tax-free savings account are getting a nasty surprise this month.

They’re being penalized for excess contributions, even though they kept their balances under the $5,000 annual limit.

If you have contributed the maximum to a TFSA and you withdraw any of your money, you must wait until the following year to contribute again.

Removing and replacing money in a single year means you’ll get dinged for 1 per cent of the amount you contributed over the initial $5,000.

To clarify, here's an example. Say you contributed the full $5000 to your TFSA at the beginning of the year on January 1st. Then, on January 15th, an emergency comes up (like your car's transmission dies), and you need to pull out $3000 from your TFSA for repairs. Now, in February when things are better, you repay that $3000 back into your TFSA, to ensure that you've still contributed the max allowable amount for the year. Seems reasonable right? Well, not if you're the Canadian Government, as now you should be prepared to get destroyed with hidden taxes for this usage and reimbursement.

The Canadian Government, seeing this as you having already contributed the full $5000, and then contributed an additional $3000 on top (not taking into account the fact that you were simply replacing the money that you used), will now hit you with 1% tax on the additional amount times every month remaining in the year.

So, in our example, that means that you would pay 1% on $3000 x 11 months = $33,000 x 1% = $330!!!! In a typical TFSA, the tax-free interest that would have been earned would be around $48 for the year. Now, with this hidden 1% tax, Canadians will be completely on the losing end, therefore showing that this TFSA is nothing more than a new way to scam Canadians for more taxes on money that they've already paid Income Taxes on...

Oh, how truly gullable and naive we Canadians are...

Simply put, at the end-of-the-day, this shows that TFSAs are truly only beneficial to the rich, as people who may actually need to use the money (the poor) end up paying a huge price. While those who have absolutely no need for the money, can just put that measly $5000 into this account, and never use it, therefore getting the only true benefit out of the account...

Federal Finance Minister Jim Flaherty says that this "fine-print" policy was implemented in order to:

"Restrict tax avoidance schemes and prohibit asset transfer transactions between TFSAs and other registered or non-registered accounts".

Yes, yes, another policy that is designed to stop the rich from milking the system, while punishing the poor for...well...being poor and needing the money.


Screenshots taken from on Government of Canada website


Anonymous said...

A TFSA is supposed to be a long term savings/investment account.

Tell your witless investor if he withdraws money from his TFSA to deposit it an ING account until the following year.

jackandcokewithalime said...

That's great advice Anonymous, but completely misses the point...

The point is, why does the Government have to play these games with peoples' lives? Why can't people just top up what they used?

Is that such a complicated thing?

Why should we ALL have to suffer because the Government is too lazy to deal with those who are scamming the system? At the end-of-the-day, it's the innocent poor folks who are being hurt by the Government's laziness.

It's like when the Government goes after poor folks who claimed an extra $1-2k on their income tax return -because that's easy, while choosing not to go after rich folks who stash millions away in illegal offshore accounts -because that's harder. They have the names and account numbers, yet they decide not to go after them. Instead, they go after the people who are struggling to survive?

It's yet another Government program that benefits the rich (people who don't need to access their money), while punishing the poor (people do actually need to access their money).

And for a product that the Government boasts as being "flexible" and having "access", it sure seems to be "un-flexible" and very expensive to "access".

I mean, not all people have the luxury of having maxed out their RRSP contributions, and therefore needed another way to stash money away with tax benefits (I find it interesting that they keep coming up with products for those people... You know, people who don't need that extra help). The majority of people out there may actually need their money before they retire, and this program punishes them for that.

Charging people taxes on money that they've already paid income taxes on, and then claiming that this product is a good thing for them...

Don't worry Anonymous, I wouldn't expect that you would understand the frustration in that...


Consumers Council of Canada said...

Canadians interested in knowing more about Tax-Free Savings Accounts may be interested in the Consumers Council of Canada’s comprehensive research report on the subject.

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