How do you justify ETFs for people with smaller money? For example, $10,000 with monthly contribution of $100 will cost tons of money with commission. It doesn't make sense for dollar-cost-averaging. I think there is a place for non-ETF especially for those lower net worth or dollar-cost-averaging, which ETF can never serve as efficient vehicle. - T.T.
 

I have never suggested that ETFs are the ideal investment vehicle or that they are suitable for everyone. In the situation you describe, you would probably be better off investing in a low-cost mutual fund with an automatic contribution plan. - G.P.

I have been encouraging my family to open Tax-Free Savings Accounts this year even if they put in a minimum amount of $100. I have said that if they leave it to 2010, they will lose the opportunity to top-up 2009 at a future date, when their finances improve. Is this correct? - Morris R.
 

No. As with RRSPs, unused TFSA contribution room can be carried forward indefinitely. However, the longer the delay before the account is opened, the more tax-free earnings are lost. - G.P.
 

I am 62 and retired. My taxable income for 2008 was just over $24,000, around $14,000 below the threshold where I would have gone up to the 22% income tax bracket from 15%. 
This is actually a two-part question. I have approximately $400,000 in an RRSP which I don't expect to need until I must convert to a RRIF at age 71. Is there a case to be made for withdrawing $5000 from my RRSP and investing the money in a TFSA, or is it better to leave the money in the RRSP until I must withdraw it? My tax accounting is simple enough that I can fairly accurately calculate for tax purposes the monetary difference between the lowest (15%) tax bracket and the next higher bracket prior to year-end, if I wanted to withdraw the maximum amount up to the 15% threshold.

I have enough capital outside my RRSP that I am able to put the allowable $5000 into a TFSA account for the next eight years, without using my RRSP money. - Geoffrey S.
 

Your last sentence tips the balance here. If you did not have the money available outside the RRSP for a TFSA contribution, I would have said your logic makes sense. But you do, so it doesn't.

The goal of any investor should be to minimize taxes. This means tax-sheltering as much money as you can for as long as you can. The money in the RRSP is already tax-sheltered. The capital outside the plan is not so you will pay tax at the marginal rate on any investment income it earns. Therefore, your best strategy is to shelter as much of that capital as possible by using it to make a maximum TFSA contribution each year.

You did not mention a spouse but if you have one you can give her $5000 each year to open her own plan, thereby doubling the tax-sheltered amount. - G.P.
 

I work on contract. Currently my income stream is fine until the contract expires in September. I can always try to get contract work again, although it is not guaranteed. I wonder about my priorities in managing my finances. Should I build my cash reserve, make an RRSP contribution, or make a lump-sum payment against my mortgage? I have cash for four months of living expenses right now. - Alison Y.
 

Given the uncertainty of your situation, I suggest adding to your cash reserve. You may want to consider opening a Tax-Free Savings Account and keeping your emergency money there so as to eliminate taxes on the interest. Just make sure you don't lock in to a GIC in case you need to withdraw money.

If your employment situation becomes more stable, you can then withdraw some of that cash and make an RRSP contribution. Use the refund it will produce to make a mortgage payment. Yes, it's a balanced act but it works. - G.P.
 

My husband and I opened two individual TFSAs, depositing $5,000 each on April 29/09. Since then we have found out that our daughter has been accepted in a post-graduate program. We did promise to her a while back that we would help her out with tuition. Now the question is: Can we withdraw some of the funds at the beginning of each semester and apply the proceeds against her tuition and re-invest the same amount prior to the year end? For instance, this year we would withdraw money from the TFSAs in September and by December we will re-deposit the same amount in the same TFSAs, repeating this procedure semester after semester. - Nina S.
 

Sorry, your plan won't work. You are allowed to replace the money you withdraw from a TFSA but not until the next calendar year. If you redeposit the cash in December, it will be considered an overcontribution and you will be assessed a penalty of 1% a month on the excess. - G.P. 
 

In the next 2-5 years, my wife and I will be funding our retirement from CPP/OAS, a small pension, non-sheltered investments, TFSAs, and RRSPs. For tax efficiency, I assume we should draw down from our non-sheltered investments first (to supplement CPP/OAS and pension income). However, once those funds have been exhausted, will it be more tax efficient to drawn down from the TFSAs or RRSPs first?

We loaded up our TFSAs with blue-chip, dividend generating equities that should provide a dividend stream and (hopefully) long-term capital gains that can continue to grow completely tax-sheltered in the TFSAs. If these same investments were made in the RRSP, the dividend income and capital gains would eventually be taxed on withdrawal as if they were interest income. But these TFSA benefits will be short-lived if we have to draw down from the TFSAs first (recognizing that our non-sheltered investments will run out in a few years). - K.S.
 

I would leave the money in the TFSAs and draw down the RRSPs. Here's why.

Let's suppose you have the same $5,000 investment in each plan earning 7% annually. Five years from now, that investment will be worth $7,012.76. Now you are faced with a withdrawal decision. If you take the money from the RRSP, using a marginal tax rate of 30%, you will be assessed $2,103.83 on the withdrawal. That will leave you with a net, after-tax return of $4,908.93. Note that is less than the value of the original $5,000 investment which means that all the income you earned over the five years and more went in taxes. By comparison, a TFSA withdrawal will be worth the full $7,012.76 - you keep all the investment income.

This example does not take into account the benefit of the tax refund you received for the RRSP contribution but that is in the past. What you are concerned about now is realizing the highest after-tax return from invested money that is already tax-sheltered. Leaving the TFSAs intact is the best way to do that. - G.P.
 

What are the tax implications of selling a second property owned abroad? - Angela O.
 

As far as the Canadian government is concerned, you're on the hook for capital gains tax if you made a profit on the sale. The fact that the property is outside the country is immaterial; you must pay tax on your world-wide income.

Depending on where the property is located, you may also have to pay tax to the host country or at least file a return there. This is the case for property in the United States, to cite the most common example. In situations such as this you may wish to use the services of a professional who specializes in cross-border taxation. - G.P.
 

A friend of mine who lives overseas, namely Jordan, wants to send me a gift of $20,000. The money will be transferred from his bank in Jordan to my bank here in Canada. The way I understand it, there is no gift tax in Canada. Is this true?

My other question is: If he sends the money in one go, will this get me into any kind of problems with anyone? I understand that my bank requires a letter from his bank stating that the money is a gift.

Are there any other things I need be aware of regarding this transfer? - Khaldoun
 

It must be nice to have such a generous friend. Yes, you are correct that there is no gift tax in Canada. However, for such a large amount you certainly should keep a copy of the letter stating it is a gift in case the Canada Revenue Agency comes calling. And you should be able to explain to them why a friend would give you so much money if they pursue the matter.

You should also be aware of the fact that Canada, in line with other Western countries, has enacted tough anti-money laundering and anti-terrorist financing laws. Among other provisions, these require financial institutions to report any "suspicious" transaction to a new organization that few people have heard of: the Financial Transactions and Reports Analysis Centre of Canada (FINTRAC). I have no way of knowing whether this particular gift would be considered suspicious but you should be aware of the possibility. - G.P.
 

I am not sure if the carry-forward of unused contribution room starts when you open your first account or did it start with the introduction of the Tax-Free Savings Account program itself? For example, if I open my first TFSA account in 2015, will I have a $25,000 contribution limit at that time? - Ashok G.
 

Canadians begin accumulating TFSA contribution room at age 18, with 2009 being year one of the program. You don’t have to open an account or even file a tax return. Assuming you are age 18 or older now and don't open a TFSA until 2015 as you suggest, at that point you will have accumulated six years of carry-forward room (2009-2014), worth $30,000 using the current annual maximum. Add another $5,000 for 2015, and you'll be able to contribute $35,000 that year. In fact, the amount will probably be somewhat higher since the contribution limit is indexed to inflation, although it only moves in $500 increments. - G.P. 
 

We contributed to a family RESP. My daughter was accepted to university and will start this September.

We bought a house and we are counting coins to reach the 20% down payment to avoid CMHC insurance. My question is: I have money in the RESP and I want to know how can use it for three months to cover some expenses. After that time, I can put the money back (into her account or back into the RESP).

This is my first question, how can I know if you answer it? - Eddy L.
 

You are legally allowed to withdraw the contributions you made to the RESP any time with no tax consequences, unless the money is locked in. That will depend on the nature of the plan and how the money is invested. For example, some types of RESPs restrict capital withdrawals. You will also have a problem if the money is in a locked-in GIC. Check with the plan's administrator to find out your options.

If there are no restrictions, you can take out as much of the capital as you need to tide you over. You cannot withdraw the investment income earned, however; that must be used by the student for educational purposes.

The only way to know if your question is answered is to check this page each week. Due to the volume of questions, I cannot send personal answers. - G.P.