FRED:  Welcome to the Scotiabank Podcast. I’m Fred Ketchen, Director of Stock Trading for ScotiaMcLeod. These regular podcasts call on some of Scotiabank’s most knowledgeable experts to help you make the most of what you have. Here we’ll discuss strategies designed to put you in the financial driver’s seat.

In today’s episode, I’m joined by a special guest Canada’s best known financial author, Gordon Pape. Gordon is going to talk with us about the importance of the new “Tax Free Savings Account” which launched this past January. How it can fit in with your financial plan and make you rich. Gordon, after authoring and co-authoring more than 40 books on investing and personal finance, what was it about the launch of the TFSA that prompted you to write this new book about the “Tax Free Savings Account”.

GORDON:  Well actually, Fred, when I wrote my last book called “Sleep Easy Investing” I said that’s it. I promised my wife that I would never write another financial book and then, of course, Mr. Flaherty came out in the budget of February 2008 with these “Tax Free Savings Accounts”. I, frankly, felt at the time and feel today that they’re the best investment savings vehicle we’ve had since the RRSP. So, we’re going back to the time of John Diefenbaker now. The long-term impact of these is terrific, especially for younger people, and Flaherty himself said that he expects that within a generation 90% of all personal investment income earned by Canadian is going to be tax sheltered either in these plans or in RRSPs. You know as the year wore on, I became aware that not many people were aware of them, and so finally in September I said to my publisher, “I think we need a book on this” and they said yes and so here we are.

FRED:  Well, Gordon, let’s get back to basics and discuss some fundamentals about a “Tax Fee Savings Account”.

GORDON:  Okay, first of all anyone who is a resident of Canada, very important, a resident of Canada eligible eighteen or older, you can’t open one up if you’re younger than eighteen, there’s no upper age limit. So, anyone over seventy-one who can’t have a RRSP can have these plans. You can contribute up to $5,000.00 a year, that’s $10,000.00 for a couple, you can contribute either in cash or you can make a contribution in kind if you have a security that like a GIC and you want to put into one of these plans, you can. The important thing to remember is there is no tax deductions for this unlike RRSPs. You don’t get a tax deduction. You can carry forward your unused contribution room in perpetuity. So, if you don’t use it all in 2009, whatever you don’t use you can carry forward to 2010. The year end for these is December 31st unlike the RRSPs which is sixty days after the end of the year. Things important people realize is there’s no over contributions unlike RRSPs which have a $2,000.00 over contribution limit. The really good side of the equation is all withdrawals are tax free forever. Your principal, your earnings all tax free forever and if the husband and the wife don’t have enough money individually to open these accounts, one can transfer money to the other, the income splitting rules don’t apply here. And, I think the last thing we want to note here, Fred, is that depending upon the kind of account you set up, you can invest in anything, you can invest in an RRSP, in stocks or bonds or GICs, mutual funds anything at all.

FRED:  So, is there a specific demographic or type of investor that is more suited than another to a Tax Free Savings Account?

GORDON:  No, you know, this is one of the plans, that as far as I’m concerned is universal. They’re really good for everyone and it really depends on your personal priorities as to how you want to use them. For example; my daughter opened an account and what she did was she decided that they wanted to use the money for an emergency funds so she just opened a savings account, kept the money in there. On the other hand, if someone wants to save money for retirement, long-term growth that kind of thing, they may want to open a plan that can hold mutual funds or perhaps one that can invest in stocks or bonds or something like that. I like them for pension plan members because usually their RRSP contribution room is limited so this gives them an extra type of program in which to build for their retirement savings. They’re especially also good for retirees, you know after age 71 we can’t contribute to our RRSPs anymore. So, now you’ve got something new that you can contribute to and start building some tax savings there.

FRED:  Well, Gordon this time of the year everyone is focusing on their RRSPs. How does the Tax Free Savings Account work with an RRSP, is one meant to replace the other?

GORDON:  No, and I think it’s important that people understand this. They’re really complementary programs, they’re quite different in their nature but they’re complementary programs; and ideally, everyone will have both plans. Will have both an RRSP and they’ll have TFSA, I call them TFSA accounts; and the fit really depends on your individual goals. There certain situations for example; when a TFSA would be a better type of plan to use. For example; if you’re in a situation where you’re taxable income, your tax bracket is likely to be higher after you retire than it is now, than you would definitely want to use one of these plans. That may be the case if you’re working at a low tax province now and are going to be move to a high tax province when you retire. On the other hand with an RRSP, if your tax bracket after you retire is going to be lower, than the RRSP is better as the first choice. But I always suggest make the RRSP contribution and than take the refund, put it into a TFSA.

FRED:   Not a bad idea. The title of your book is “Tax Free Savings Accounts: A Guide to TFSA and How They Can Make You Rich”, now the annual contribution limit on a TFSA is $5,000 a year. How can $5,000 a year make someone rich?

GORDON:  Well actually, it can and there are several examples in the book of this. This is the real magic of compound interest or, if you like, compound income at work. The “eighth wonder of the world” as it’s been called and I have an example in the book of a young couple, 22 years old, don’t have a lot of disposable income. They start with a $1,000 a year each going into an account. Every five years, they bump it up by $500 so we’re not talking about big contributions, and they invest in a balanced fund which is yielding about 7%... by the time they retire between them, they have tax free savings of $1,200,000.

FRED:   Incredible, $1,200,000.

GORDON:  $1,200,000.

FRED:   Good grief. Gordon, if you had to pick three things that Canadians should know about a TFSA, what would those three things be?

GORDON:   Well number one, they’re universal as I said before, they’re good for anybody age eighteen plus. I can’t imagine the situation in which they wouldn’t be valuable. Secondly, the growth potential, contribution limits as you pointed out may be relatively low to start, but over time people can accumulate hundreds of thousands of dollars in these accounts or as in this example I just gave over a million dollars depending if you’re young enough. And the final point is the profits are yours to keep forever. The government never takes a penny.

FRED:   Thank you Gordon for sharing with us your views on the new Tax Free Savings Account and its importance in the financial plans of Canadians. We hope that this discussion has helped you, our listeners, understand how a TFSA might fit into your life and help you reach your financial goals.

Thank you for joining us. I’m Fred Ketchen. For more information, please visit your local Scotiabank or ScotiaMcLeod branch. We’ll help you make the most of what you have.