TFSA versus RRSP: The new tax-savings math

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Last week's federal budget centrepiece was the Tax-Free Savings Account (TFSA), giving investors a new vehicle to save on taxes. As previously reported, the TFSA is scheduled to make its debut in 2009, allowing maximum contributions of up to $5,000 a year.

Although a TFSA is very different from an RRSP, each of these accounts holds an after-tax advantage in returns over a non-registered account. Everyone who is 18 years old and over will be able to contribute to a TFSA, and if you are eligible to make RRSP contributions it will generally be to your advantage to contribute to both.

That, of course, depends on having the money available. According to a national BMO Financial Group/Leger poll released on Feb. 27, more than half of Canadians are not making an RSP contribution this year.

Also in this week's Fund Watch: Addenda agrees to Co-operators takeover offer Third ex-Trimark manager joins EdgePoint AGF seeks approval for fund mergers, other changes AIC's Naccarato takes on technology mandate as Hofstra departs McLean Budden's Mary Hallward retires

Realistically, for a large number of Canadians who won't be able to contribute to both a TFSA and an RRSP, the question becomes: Which one of the two will leave me further ahead?

To illustrate the differences between the TFSA, RRSP and non-registered savings, the Finance Department created a table (See below) comparing the three according to one scenario. The example used a $1,000 one-time contribution, held for 20 years by an individual with a 40% marginal tax rate. The assumed return, implying a very conservatively managed portfolio, was a compound annual 5.5%.

The RRSP investor jumps out to an early lead, since there is a tax deduction that leaves this account with the full $1,000 to invest. The TFSA and non-registered accounts, by contrast, start out with only $600, since they must make their contributions with after-tax dollars.

Both the TFSA and the RRSP accounts enable income to accumulate tax free, while the holder of the non-registered account gets hit with income tax each year. The RRSP extends its lead, since it started out with a larger amount, while the TSFA ranks second and the non-registered account lags.

By the end of 20 years, the value of the net contribution plus investment income has reached $1,751 for the TFSA, $2,918 for the RRSP, and only $1,307 for the non-registered account. (The government's example for the non-registered account assumes a tax rate of 28% on investment income, based on portfolio returns that are assumed to be composed of 30% capital gains, 30% Canadian dividends and 40% interest.)

The great equalizer between the TSFA and the RRSP account occurs at the time of withdrawal. The value of the TSFA remains at $1,751, since no taxes are payable on withdrawal of either the original TFSA contribution or any capital gains, dividends or interest earned.

But the $2,918 RRSP is taxable at the highest marginal tax rate at the time of withdrawal, which works out to a tax hit of $1,167. This leaves the RRSP holder with after-tax proceeds of $1,751, thereby finishing in a dead heat with the TFSA holder. (The non-registered account finishes last with $1,307.)

The key variable is how the tax rate at the time of withdrawal compares to the tax rate at the time of the contribution. Here are the three scenarios, and how they may affect your choice of account:

• If the two rates are identical, as in the hypothetical example cited in this article, the TFSA and the RRSP are equally effective tax-savings alternatives.



• If the tax rate at the time of withdrawal is lower than at the time of contribution, the RRSP is the better choice.



• If the tax rate at the time of withdrawal is higher than at the time of contribution, the advantage goes to the TFSA.

In other personal-finance related developments in the budget, there were several changes affecting life-income funds (LIFs) and registered education savings plans (RESPs).

LIFs are locked-in pension accounts. They hold assets that are transferred from a registered pension plan to an individual who would prefer to manage his or her own account rather than remain in the pension plan. LIFs can be created, for instance, when individuals are laid off from an employer.

The budget provides much increased flexibility for LIF holders to gain access to their assets. Individuals who are 55 years or older, and with LIF holdings of up to $22,450, will be able to wind up their accounts and have the option of transferring the assets to an RRSP or a registered retirement income fund (RRIF).

Those 55 and older are also entitled to a one-time conversion of up to 50% of their LIF holdings into an RRSP or RRIF, with no maximum withdrawal limits.

In addition, all individuals facing financial hardship (such as low income, disabilities or medical costs), will be entitled to unlock up to $22,450 from their LIFs.

As for RESPs, the budget proposed changes in the time limits and age limits. The maximum number of contribution years will be increased to 31 years, up from 21 years. The lifetime contribution limit remains at $50,000.

The deadline for terminating an RESP will be extended to the year that includes the 35th anniversary of the plan, up from the current 25th anniversary. If the beneficiary qualifies for the disability tax credit, the deadline is extended to the 40th anniversary year, up from the 30th year.

In terms of age limits, no contributions can currently be made in family plans for beneficiaries who are 21 or older. The budget calls for raising this age threshold to 31 years old.

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Addenda agrees to Co-operators takeover offer

Montreal-based Addenda Capital Inc. (ADV/TSX) has become the second large institutional money manager in less than a week to confirm a friendly takeover agreement. Co-operators Group Ltd., which is based in Guelph, Ont., announced on Feb. 25 it has agreed to acquire a controlling interest in Addenda. The transaction places a value of about $306.5 million on Addenda's equity.

Addenda, which specializes in actively managed fixed-income portfolios, currently manages an estimated $29 billion. The Co-operators takeover bid comes on the heels of Royal Bank of Canada's $1.4-billion deal, announced on Feb. 21, to acquire Phillips Hager & North Investment Management Ltd. of Vancouver.

The proposed acquisition calls for Addenda to be amalgamated into a newly created Co-operators subsidiary. The $26.50-a-share offer on Feb. 25 represents a premium of 23.8% to the previous week's closing price. The Addenda shareholders' vote is to be held sometime in April. Subject to shareholder and regulatory approval, the transaction is expected to close in two to three months.

Different purchase terms will apply to the shares of Addenda held by senior management shareholders and by Solidarity Fund QFL, the Quebec labour-sponsored venture capital fund. The management shareholders have agreed to accept half of their payment in the form of equity.

Solidarity Fund, meanwhile, has agreed to take all of its payment in the form of equity and will subscribe to additional shares. Employee shareholders other than senior management will be given the opportunity to retain their stakes in the business by exchanging their existing Addenda shares for shares of the company into which Addenda will be amalgamated.

Collectively holding an estimated 25% stake in Addenda, senior management and the Solidarity Fund have agreed not to solicit competing takeover offers. If a higher unsolicited bid emerges from another company, Co-operators has the right to match it or to receive an $8-million break-up fee from Addenda.

Once the transaction is completed, Co-operators Group will combine the business of its wholly owned subsidiary, Co-operators Investment Counselling Ltd. (CICL), with Addenda. The combined entity, operating under the Addenda Capital Inc. name, will have assets of about $40 billion. Its head office will be in Montreal, with regional offices in Toronto, Guelph and Regina.

Michael White, currently president of CICL, will become president and CEO of the reconstituted Addenda. CICL's chief investment officer Jim MacDonald, and his Addenda counterpart CIO Yvan Fontaine, will become co-chief investment officers.

Most of Addenda's management group will continue to serve in senior roles in the new entity. They include Myriam Larcher, who will remain chief operating officer and chief financial officer, and Benoît Durocher -- Addenda's current president and CEO -- who will become executive vice-president, client service and marketing.

Though nearly all of Addenda's assets managed are institutional, the company has a small presence in the retail investment fund industry as a sub-advisor to segregated and mutual funds. It is a manager or co-manager of several Astra segregated funds sponsored by Quebec City-based SSQ Financial Group. It also manages a Canadian bond fund for the seg-fund family sponsored by Desjardins Financial Security Life Insurance Co., and a bond mutual fund launched in January by Toronto-based JovFunds Management Inc.

For its part, Co-operators sponsors a segregated-fund family whose fixed-income funds currently include internally managed funds and funds managed by AIM Trimark Investments and Fidelity Investments Canada. The acquisition of Addenda will significantly increase Co-operators' ability to manage fixed income assets in-house.

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Third ex-Trimark manager joins EdgePoint

Geoff MacDonald, another former Trimark portfolio manager, has joined the fledgling firm EdgePoint Capital Partners Inc. as chief investment officer. The announcement was made on Feb. 27 by EdgePoint president Tye Bousada, who until January was lead manager of Trimark Fund .

MacDonald joins Bousada and Robert Krembil, the original head of the Trimark investment team, as a shareholder of Cymbria Capital Corp. EdgePoint is a wholly owned subsidiary of Cymbria.

As previously reported, EdgePoint is in the process of obtaining regulatory approval to operate a fund management business.

MacDonald, who resigned from AIM Trimark Investments in August 2007 and subsequently observed a four-month non-compete period, had been with the Trimark organization since 1998.

Over the years, he has been responsible for a wide range of foreign and domestic equity mandates, including diversified, small- and mid-cap, and natural resources. At the time of his resignation from AIM Trimark, his largest mandates were the equity portion of Trimark Income Growth , along with Trimark Global Endeavour  and Trimark Canadian Endeavour .

MacDonald said he was approached by Bousada to join EdgePoint, and agreed to terms on Feb. 26. He told Morningstar he is looking forward to working at an organization that is led by investment professionals.

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AGF seeks approval for fund mergers, other changes

AGF Funds Inc. is seeking investor approval to streamline its mutual fund line-up by merging three funds. The company also wants to revise the investment objectives of one of its global equity funds. The proposed mergers are:

Merging fund	Continuing fund
AGF Germany Class	AGF European Equity Class
AGF Aggressive Japan Class	AGF Japan Class
AGF RSP Global Bond	AGF Global Government Bond

AGF also wants to bring the investment objectives of AGF World Companies into line with the fund's corporate class counterpart, AGF Global Equity Class. While Morningstar was unable last week to obtain specifics of the proposed changes from AGF officials, the objectives of AGF Global Equity Class currently state that up to 25% of the fund's assets may be invested in emerging markets. There is no similar prospectus provision for AGF World Companies.

Meanwhile, AGF is also seeking approval for changes affecting several of its Harmony wrap program offerings. The company is proposing to sell the U.S. assets of Harmony Americas Small Cap Equity Pool to Harmony U.S. Equity Pool, and to subsequently merge Harmony Americas Small Cap Equity Pool into Harmony Canadian Equity Pool

Securityholder meetings to approve the various changes will be held on April 10, AGF said. If approved, the mutual fund mergers and the reorganization of the Harmony pools will be effective on or about May 23.

The revised investment objectives for AGF World Companies are to take effect on or about April 21, coinciding with the renewal of the AGF prospectus.

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AIC's Naccarato takes on technology mandate as Hofstra departs

Effective Feb. 28, Pat Naccarato became the new lead manager of AIC Diversified Science & Technology and its corporate class version. He took over from Peter Hofstra, who left AIC on that date.

Hofstra joined AIC in 2002 as an analyst, and was appointed a vice-president and portfolio manager in May 2006. He also was co-manager of AIC Value , AIC World Equity  and AIC Global Diversified, along with their corporate class equivalents.

Hofstra is the second portfolio manager to leave AIC in as many weeks. As previously reported, Anne-Mette de Place Filippini departed on Feb. 14.

Naccarato, who joined AIC in 2005, continues as lead manager of AIC Value. In the past couple of weeks, he also became co-manager of AIC World Equity and AIC Global Diversified, two of the mandates for which de Place Filippini was previously the lead manager.

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McLean Budden's Mary Hallward retires

Feb. 29 was the last day of work for veteran McLean Budden Ltd. portfolio manager Mary Hallward, who has retired. An executive vice president and director, Hallward was a member of the asset mix, U.S. equity and global equity teams. She joined the firm in 1992. Until last week, her roles in recent years included co-managing McLean Budden Global Equity, McLean Budden American Equity  and TD Balanced Growth - I.

Citing the firm's team approach, McLean Budden president Roger Beauchemin said Hallward's departure would not affect the investment approach of the funds in which she was involved.

"Our team structure reflects our focus on ensuring stability and continuity," Beauchemin told Morningstar. "The teams have been constituted in advance to account for predictable eventualities such as this one."

-- With files from Diana Cawfield