Contribute to the TSFA at any interest rate

par Ian Bolduc | April 26 2009 08:40PM

Some clients think the tax savings on investment products within TFSA are modest this year because of the low interest rates. This is because many perceive TFSAs as glorified daily interest savings accounts. In fact, TFSAs also yield capital gains and dividends.

Advisors must clarify, from the start, which investments are eligible for the plan. GICs, mutual funds, segregated funds, annuity products, exchange-traded funds, listed stocks and bonds are all permitted.

If the client wants to invest in a vehicle that generates interest only, the TFSA is still worthwhile, even if interest rates are low. "Sixty dollars in my pocket is better than $60 in the government's coffers," says Jacques Potvin, Vice-President of Marketing, Insurance and Individual Annuities at Industrial Alliance. "You have to recover every penny." Peter Aceto, CEO of ING Direct agrees: "Even though rates are a little low right now, you might as well not pay taxes on it."

Danielle Coutlée, manager, Sales Strategy and Support at RBC Royal Bank, underlines that an additional $5,000 will be added to the contribution limit next year. "The amount people can keep in the account increases each year." Tax savings will grow in line with account holdings, she adds. The effect of tax-free compound interest is definitely a selling point.