When one invests in flow-through shares of junior companies, they may become illiquid, and thus difficult to sell. One important option that few know about is to transfer them into you TFSA. This can be done at a low closing price to maximize the room in the TFSA. Occasionally you may get a non taxable home run that may be worth it.
As a side not, the big banks are promoting the TFSA for interest and dividend income – THIS IS JUST PLAIN WRONG. This is in the banks best interest, not yours. The best use of a TFSA for an individual investor, in my opinion, is for your riskiest and most volatile stocks. Sure, you will not get to carry back capital losses, but in the case of the occasional 10 bagger there will be no taxes.
Volatile and illiquid stocks can be moved into your TFSA and take advantage of temporary price swings to manage your TFSA into a viable tax haven. This is particularly interesting because one could theoretically transition a significant part of a taxable portfolio into a non-taxable TFSA using SWAPs. Think about this, move the volatile stock in when the price is low, when the price pops for some reason, SWAP the stock out and move cash in. Presto, you have increased the room in your TFSA! Wait for the stock to drop in price and SWAP even more of it back in. This may seem almost impossible to do and difficult to time, but with the lack of liquidity in today’s junior market, a stock can double on almost no volume – or drop by half. People with a portolio of flow-through shares or other junior stock they can’t sell due to lack of liquidity are in the perfect position to take advantage of the TFSA SWAP.
Remember, the purpose of the TFSA SWAP is to increase the room in your TFSA as fast as possible to theoretically transition your entire portfolio into it. This will cost you as most brokers charge a fee for a SWAP, in the range of $100, but to be tax free forever in your portfolio can be priceless.
#1 by Dave on July 3rd, 2009
Finally it has been said… “big banks are promoting the TFSA for interest and dividend income – THIS IS JUST PLAIN WRONG.”
I moved 50,000 units of a junior exploration company at its 52 week low into two TFSA (mine and my wifes) for a total of 100,000 units ($5k each). This was literally the day my accounts opened. Today they are trading between $0.30 and $0.40 – you can do the math and see what tax savings are involved. When these go above $0.50 (They have traded as high as $0.72) I am considering dumping and diversifying. At $.5 that is a gain of 400% or +$20,000 in six-nine months (again for BOTH accounts). I will buy plenty of stocks that pay out dividends and pull money out once a year, and increasing my contribution above the $5k limit for the next year. I will continue to buy ‘riskier’ units in my regular trading account to transfer in (at no cost) my TFSAs.
GIC and earning interest is the worst thing to do in these accounts. This is your personal, legal off-shore account, it is too powerful a tool to waste.
Dave
#2 by Admin on July 3rd, 2009
Dave I fully agree, you are maximizing the TFSA in a way that probably was not taken into consideration when it was designed. I hope the TFSA is here to stay.