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TFSA - Tax Free Savings Account - Best TFSA Investments

Sunday, August 2, 2009

TFSA - Tax Free Savings Account - Best TFSA Investments

I have thought long and hard about the best investments for a TFSA account. There are so many potential investments and strategies that can be employed; however, I have concluded that my TFSA will be used for investments that are relatively low risk and tax inefficient to make the most of the TFSA tax implications. I will provide a link to a Government of Canada Website with information pertaining to TFSAs and then describe what I consider to be the best investments for your TFSAs.

The TFSA became active during the 2009 tax year in Canada. The Government of Canada decided that it was in the best interest of the Country to encourage more savings. The lack of savings became a problem over the past decade. It helped spur the last major bull market on the TSX; however, this was unsustainable as has been displayed by the recession that followed.

For more information about the new Tax Free Savings Account (TFSA) please view the government website at

Now, let me discuss what I think the best investments for your TFSAs are.
In my opinion, your TFSA should be used for an investment instrument that is relatively safe since you cannot write off potential tax losses against your investment income; and should be an investment that is taxed more heavily by the government. There is one investment that comes to mind immediately and after much research I do believe it is the BEST investment for TFSAs - Income Trusts.

Income Trusts have become an eye sore for many investors since the government announced the increased taxation and then the down turn that followed. Here is why I think Income Trusts are the best investments for the TFSA: Firstly, even after all the reductions in distributions due to lower profits during the recession, Income Trust on average are currently yielding around 9% annually in income distributions; Secondly, since the new tax implications remove a sizable portion of the income gained when held outside of an RRSP or TFSA, these are very inefficient investments for the majority of the money in the market place; thirdly, if the government ever decided they were too harsh by changing the taxation on these investments they would increase in value dramatically; forth, Income Trusts also increase in value with regular stocks.

Market Valuation of Income Trusts

The market valuation of Income Trusts will continue to be driven by the big money; this means the RRSP and TFSA money that does not need to consider the high tax implications does not determine the market price for these investments. As a result, the market will continue to demand very high pre-tax income distributions.

Increasing Distributions

With current distributions cut by most income trusts at least by half and share prices declining to the point that annual distributions are still in the 9% range, there is a ton of upside in distributions and capital appreciation to maintain the same 9% range as distributions increase again. At pre-recession levels, where distributions will go back in the future, the pre-tax income at current prices represents returns around 25-35% Just in Income Distributions.

Increasing Share Prices

As the recession ends that share prices of income trusts will increase while distributions increase.

Personally, I will be using my TFSA to buy 3 income trust positions the week of August3-7th, 2009. Check back if you want to know exactly which investments I bought.

1 comment:

cherilynn said...

thank you for posting i enjoyed it