Tips and tricks on how to manage a TFSA contribution while dealing with a margin account

The TSX losses close to 80 points yesterday. Despite all, my non-registered portfolio closed Friday session at a quite good 122 328$, exceeding the 120k by a 2 thousands, so I am happy.

I incorporated a margin into my non-registered account in somewhere in December 2011. At first, the plan was to use the margin money generated by the daily value of my holding to pay off some credit lines. I did so, but while having access to more than 50k of cold cash, I couldn’t resist the temptation. The money was there available for me and I could whatever I wanted with it. I don’t have an expensive taste for almost anything, but when it comes to investment, I do have an expensive taste and since I enjoy investing, having access to a 50k was just a too rough temptation. So I did what I shouldn’t do, I invest on money that isn’t mine.

February 29 was the last day to contribute to a RRSP. I usually make a RRSP contribution every single year but this year, I didn’t have anything ready and when I learned that taxes needed to be paid at the time of the withdraw, even as being a senior citizen, I mean, I certainly found it was a complete government ripped off. It’s not the government who’s going to make me lose my paints.

I have more than 16k in contribution room available for my TFSA. While having a margin account, it’s very hard to fully take advantage of the TFSA. It’s all depends of course of the money you dispose to invest. Currently, I am only working at one job, and my salary is not very good. While dealing with a mix of factor, it can be quite tricky to make a TFSA contribution. However, I found my way out. I am going to teach you how you can take advantage of the TFSA even while having a margin account situation.

Having a margin account can be challenging. Investing real cold cash is already challenging enough, so imagine doing it with a margin account, with money that is borrow, money that is not really yours! I did what. I assume my position; I can say however I enjoyed the flexibility my margin provides. It allows me to pay off some debt. It also allows me to make new stocks acquisition. From December 2011 to today, I haven’t deal with any problems related to my margin account. However, I am totally aware of the risks. Problems can occur.

The margin account value varies on a daily trading basis. If your portfolio gains in value, the margin account will gain in value too. But if your stock loss value, your margin account will simply follow the flow. If your investment value loses so much, you could be on a margin call and could be requested to apply some cold cash in the margin account to equilibrate the whole thing. Brokers are not making you any favor by giving you access to a margin account. It’s all business, they are there to make money and fully take advantage of retail investors like you and I. But it’s possible to make things happen. What you need to know to start with is that a margin account can be another source of stress, on top of the natural volatility of the market. While having a margin account, you need to have a big deal of high quality stocks to be able to survive the market volatility and go without a margin call. I am not exactly writing for or against a margin account situation, it’s a choice you have to make for yourself knowing the present factors. But what I am here for is to explain that even that while dealing with a margin account, you can still invest in a TFSA without too much trouble. It’s just a matter of how you are dealing with your money and of course, I am here to explain it all, one more time.

I guess you really want to know what’s the magic TFSA trick is all about right? Well, the hot stuff is coming.

The following is really easy to understand. While investing, let say 2k in Sprott Inc., that investment doesn’t worth 2k of direct margin money. The broker is giving a loan value to each and single investment you hold. Some stocks won’t have any loan value, and some will. The loan value can value from 0% to 70%. Generally speaking, the more of a stock loan value is higher, the more likely you’re dealing with a quality stock. TD Waterhouse clearly says it’s not the case, but the logic is telling me something else. The value loan of a stock could be a characteristic you may want take into account while picking a stock. But you shouldn’t ONLY rely on loan value to pick your stock.

Let’s say that, in the present time, you don’t have a significant amount of money to invest but you still want to take advantage of the TFSA, even while having a margin account situation in your non-registered portfolio. 

Well, good news: YOU CAN. And I am going to explain how it worked.

First of all, study the loan value of all the dividend stocks you hold in your margin account.

Target the lowest value ONLY.

In my case, my dividend stocks with the lowest loan value are:

Sprott Strategic Fixed Income Fund (SFI.UN)

Loan value: 117$

Firm Capital Mortgage Investment Corp (FC):

Loan value: 134$

Rogers Sugar Inc. (RSI)

Loan value: 269$

Colabor Group Inc.

Loan value: 277$

Secondly, target the higher dividend payer among the stocks who have the lowest loan value.

Sprott Strategic Fixed Income Fund (SFI.UN)

Loan value: 117$

Dividend yield: 6.43%

Firm Capital Mortgage Investment Corp (FC):

Loan value: 134$

Dividend yield: 6.97%

Rogers Sugar Inc. (RSI)

Loan value: 269$

Dividend yield: 5.91%

Colabor Group Inc.

Loan value: 277$

Dividend yield: 9.63%

Thirdly, target the investment with who you are experimenting a capital loss or very little in capital gain. Why? Because while proceeding with a contribution in kind from a margin non-registered account to a TFSA, you’ll have capital gain to pay on the amount you transferred in if you are currently experiencing capital gain with the specific investment.

Sprott Strategic Fixed Income Fund (SFI.UN)

Current value: 467$

Book value: 486.99$

Difference: -19.99$

Loan value: 117$

Dividend yield: 6.43%

Colabor Group Inc.

Current value: 1109$

Book value: 1161.60$

Difference: -52.60$

Loan value: 277$

Dividend yield: 9.63%

Rogers Sugar Inc. (RSI)

Current value: 539$

Book value: 523.72$

Difference: +15.28$

Loan value: 269$

Dividend yield: 5.91%

Firm Capital Mortgage Investment Corp (FC):

Current value: 536$

Book value: 510.79$

Difference: + 25.21$

Loan value: 134$

Dividend yield: 6.97%

You would like to transferred all of the investment selected though those steps into your TFSA?

We’ll see if it’s possible. Please calculate the loan value of all of the investments selected.   

Sprott Strategic Fixed Income Fund (SFI.UN)

Loan value: 117$

+

Colabor Group Inc.

Loan value: 277$

+

Rogers Sugar Inc. (RSI)

Loan value: 269$

+

Firm Capital Mortgage Investment Corp (FC):

Loan value: 134$

= 797$

In my case, the total of my loan value is 797$. The question you need to ask yourself is: do you have this X amount of money (in my case 797$) to inject in cold cash in your margin account? In my case, since this week is going to be pay night on Wednesday, my answer is YES. But what’s yours? If your answer is NO, you’ll have to select just a few investments. Again, calculated the loan value and asked yourself if you have that X amount in cold cash to inject in your margin account.

In my case, the investments selected are not stocks that grow. That’s why their loan value is so low. Low loan value = low amount of cold cash that need to be injected in the TFSA.

You MUST inject the amount of money in the margin account BEFORE proceeding to the contribution in kind into your TFSA. This is really important in order to keep the same amount of cash available in your margin account. Remember, a margin account situation is fragile, don’t ever think you can make your way easily with a margin account. Like never. A margin account is not financially healthy and it’s not easy to deal with.

At the end of this, I will contribute somewhere to close to 3k in my TFSA and all the dividends earn from Sprott Strategic Fixed Income Fund (SFI.UN), Colabor Group Inc., Rogers Sugar Inc. (RSI) and Firm Capital Mortgage Investment Corp (FC) are going to be free of tax, for an annual amount total of 432.32$.

Now, you know how to deal with a TFSA while having a margin account.