Welcome to TFSA trouncers, a new series that profiles Canadian investors who’ve accomplished incredible feats with their tax-free savings accounts. If you have grown your TFSA to half a million dollars or more, drop us an e-mail at dakeith@globeandmail.com, or fill out this form. You may choose to be anonymous, but we do require an e-mail address and we may request a screengrab of your portfolio for fact-checking purposes.
Marcus, 67 and now retired from the military, opened a tax-free savings account as soon as the investment vehicle was created in 2009. After a few years of having the funds invested in a simple, low-paying savings account on the advice of his local bank branch, he took matters into his own hands, first using a dividend strategy, then redeploying the funds into a growth stock.
Today his TFSA is worth $883,500. He’s also generating about $11,000 in monthly income – all tax-free.
Marcus’s success is far from the norm. The average TFSA account in 2023 was worth $41,510, according to a recent survey from the Bank of Montreal.
Luck played a big role for Marcus and those hoping to replicate his success won’t find it easy. A Canadian opening up a new TFSA today who has never contributed would have a maximum of $95,000 to start investing with.
But it illustrates how making the right call on a stock or fund, or several of them, can lead to mind-boggling investment balances that will never attract the taxman, all the while reshaping one’s retirement and estate planning.
For Marcus, the road to TFSA riches began in January, 2017, when he sold dividend stocks that he had purchased while following the Beat the TSX strategy, which is based on choosing the 10 highest-yielding stocks in the TSX 60 index. He poured much of the proceeds into Shopify stock, which at the time was trading at close to $6. He sold most of these Shopify shares in February, 2021, when it was trading near $160.
“That year, we paid cash for an RV and a new car, and did some renovations on the house,” he says.
He became interested in Shopify after reading about the high number of transactions the e-commerce platform was making in its early days, leading to tremendous revenue growth on an annualized basis. Marcus lives in Ottawa, where Shopify is based.
“At the time I was employed with the military, so I had a full-time job, and I knew I had a defined-benefits pension coming to me, so I decided to take a chance with a growth stock,” he says. “It’s pure luck that I sold when I did.”
Part of the decision to sell Shopify was because his wife had plans to retire two years before her pension kicked in. The couple wanted to replace some of that lost income in the interim.
“We had a fairly detailed budget so I knew exactly how much money we needed. Essentially, I needed roughly $45,000 a year in dividend income for her to take her retirement.”
He figured he would reinvest some of the Shopify proceeds into dividend-paying ETFs, which would generate at least that amount every year in tax-free income.
He took that strategy one step further. To maximize the TFSA income payouts, he decided to invest heavily in covered call ETFs. He learned about using these products, which employ a strategy of selling call options on underlying securities to generate high income, by watching YouTube videos. While they entail higher risks, he tries to minimize this by diversifying into several different covered call products, especially those with broad exposure to the S&P 500 and Nasdaq indexes. Over all, his current TFSA portfolio generates a yield of about 14 per cent.
He now generates roughly $134,000 a year in tax-free income from his TFSA account. He keeps growth stocks currently in his RRSP.
Marcus still has $230,000 of unused contribution room in his TFSA thanks to his decision to sell Shopify and withdraw some of the proceeds from the account. (Withdrawals from TFSAs are added back to one’s contribution room in a subsequent year, even if they total hundreds of thousands of dollars generated through investment returns.)
As for the future, he plans to draw down funds from his Registered Retirement Income Fund and reduce the tax hit through income splitting with his wife. He’ll then put those funds into the TFSA. “What I’m trying to do is to reduce that contribution room in the TFSA to zero, and then once that’s done I’ll live strictly off the funds I get from my RIF and keep investing whatever is in the TFSA.”
His TFSA funds are split into two separate accounts, one that designates his wife as successor, and the other one his daughter, as beneficiary. One day, both will benefit from this tax-free inheritance.
Marcus has made his investing mistakes over the years. Both he and his wife, for instance, bought cannabis stocks at one point that surged in value, yet they didn’t sell. The shares they held on to eventually were worth very little.
“The buying is the easy part. It’s arriving at a decision to sell at a certain point, and carrying on with it, that’s the hardest,” he says.
What an expert says
We asked Nancy Woods, portfolio manager and senior investment adviser with RBC Dominion Securities Inc., for her thoughts on Marcus’s TFSA investment strategy:
“Marcus has certainly used his TFSA in a very effective way and has been successful with his investment choices. It is rare to have such investment opportunities whereby funds multiply without taking on a lot of risk.
His timing was ideal for Shopify. It is important to note that if you are investing in a higher-risk stock the reward can be great, but the loss [can] as well. Any capital loss within a TFSA cannot be used to offset any capital gains in a non-registered account and is therefore truly a loss. An investor also has to be careful not to do any high-frequency trading within a TFSA to avoid CRA from disallowing the tax-sheltering of the gains.
The final thing I would mention is that Marcus’s plan to leave half of his TFSA assets to his daughter may not be the best decision. When you name a non-spouse as a beneficiary of your TFSA, they cannot transfer it into their own TFSA. Your spouse can. Yes, the assets pass on to his daughter without any taxation, but going forward any growth or income will be taxed. She can make contributions into her TFSA within her allowable contribution amount but nothing above. His wife, however, can transfer from his TFSA directly into hers and effectively double up on the amount in her TFSA.”
Some details may be changed to protect the privacy of the person profiled.
Read more: TFSA 101: What to know about tax-free savings account limits, contribution limits and more
Have you grown your tax-free savings account to at least half a million dollars?
If you have a TFSA valued at more than $500,000, The Globe and Mail wants to hear from you. We’re curious about what investments and strategies led to this success. Share your investing experience below. You could be featured in a Globe and Mail article.
Darcy Keith