Jonathan Chevreau, Wealthy Boomer, FInancial Post Published: Friday, January 29, 2010

Judging by the stream of reader queries, there is still much confusion over rules governing contributions to the year-old tax-free savings account.

Typical is reader Peter, whose email carried the subject line "TFSAs: My Confusion." He put $5,000 in stock in his TFSA in 2009 and its value fell to $4,000. He wonders if he can "replace" the lost $1,000 in 2010, along with the new $5,000 contribution room he obtained when 2010 began. He also wonders if he has to open a new TFSA plan in 2010 or whether the one he opened last year will "expand" to accommodate the new year.

The answer is only one TFSA is needed, but if the value of his stock fell to $4,000 that doesn't mean he can replace his losses. If he had withdrawn $1,000 in 2009 he could have contributed $6,000 in 2010, but that doesn't mean he can make good on losses on securities. Now it's 2010, he can contribute $5,000 of new money in the account, which means the current value of his TFSA is $9,000, which hopefully will grow over time.

Peter's second question was: "When I do my income tax for the year 2009, do I have to give some kind of information to the Canada Revenue Agency regarding my TFSA?" I had to check with CIBC's tax expert, Jamie Golombek. He says individuals don't have to provide information on their TFSAs to the CRA because this is handled by the financial institutions. They report electronically to the CRA all contributions and withdrawals from their customers' TFSAs. When you file your 2009 taxes this April, the notice of assessment will show your available TFSA contribution room, just as it does with RRSP contribution room.

Golombek volunteered two common questions he's been fielding lately. One is, whether you still have $10,000 in contribution room if you didn't contribute in 2009, and want to contribute this year for both years. The answer is yes.

The other question he gets is whether you can transfer your TFSA to another financial institution. Yes, you can transfer with no tax consequences, although there may be transfer fees involved, on the order of $50 to $100.

Speaking of fees, another reader question was more disturbing. Reader S.P. wrote: "RBC Dominion Securities charges 1% per year of the principal in the account. This seems like a big disincentive, especially if each year you buy and hold rather than do much trading. Are all self-directed TFSAs subject to a comparable charge?"

They aren't. This reader is clearly in a fee-based managed account and must have agreed to pay 1% a year on assets managed. RBC says: "All registered products have administrative costs associated with them to cover custody and trustee charges." Clients receive account administration and "professional investment management advice" for their all-inclusive 1% fee.

This reader could bypass the 1% fee by moving his TFSA to discount arm RBC Direct Investing. In doing so, he would only pay commissions to buy or sell securities. But he'd be on his own when deciding what transactions to undertake.

The lesson here is that charges vary by institution and type of brokerage account. Gordon Pape's The Ultimate TFSA Guide lists common TFSA charges at most banks, brokerages, trust firms, credit unions and insurance firms.

Reader Michael Wheeler agrees banks should be more open about self-directed ­TFSAs. "Tell your readers when setting up a TFSA to ask the right questions so they are put into the right type of plan to invest in more than just plain low-interest accounts."

Even the savviest of investors have TFSA troubles. One reader is at a startup green technology firm, where employees can buy shares before they go public. To shelter the likely windfall, he wants to hold it inside a TFSA, but BMO Investor Line wouldn't oblige. When he tried its full-service sister firm BMO Nesbitt Burns, he was told the transaction would incur considerable costs because it's considered a private placement.

Golombek says many self-directed brokerages are not comfortable holding private shares in client TFSAs because of valuation issues. It's technically legal, as long as you don't own more than 10% of a firm's shares, but it's clear that for the small amounts involved, most institutions are reluctant to process such trades.

Financial Post

jchevreau@nationalpost.com