(I recently wrote a special bulletin about how the election results could affect your investments. Click here to read this special bulletin and add your comments.)

The federal government first made TFSAs available to investors in January 2009. Your TFSA lets you earn investment income — including interest, dividends and capital gains — tax free. You could contribute $5,000 in 2009 to start your tax free savings account.

Every year, you can contribute an additional $5,000 to your TFSA. If you contribute less than $5,000 to your TFSA in any given year, you can carry the difference forward. That means your TFSA contributions for 2009 and 2010 totalled $10,000, rising to $15,000 in 2011, $20,000 in 2012 and so on.

Under the government’s proposal, the $5,000 annual contribution limit to your tax free savings account would double to $10,000.

Exchange traded funds remain our top choice for tax free savings account investing

Whether or not the Conservative government follows through on its promise, we continue to think tax-free savings accounts are a good choice for investors.

Even though your total TFSA contributions have risen to $15,000 for 2011, it’s still difficult to build a diversified portfolio within your TFSA. That’s why we continue to recommend that you look to exchange traded funds, like the iShares S&P/TSX 60 Index Fund (Toronto symbol XIU), for TFSA investing.

The fund is a recommendation of our Canadian Wealth Advisor newsletter. Its units are made up of stocks that represent the S&P/TSX 60 Index, which consists of the 60 largest, most heavily traded stocks on the exchange. Most of the stocks in the index are high-quality companies.

The exchange traded fund’s units trade on the Toronto exchange, just like stocks. Prices are quoted in newspaper stock tables and online. You’ll have to pay brokerage commissions to buy and sell them, but you will quickly make these back because of the low management fees, which are just 0.17% of the fund’s assets.

Over the years, as the value of your TFSA increases, you could switch to a well-diversified portfolio of conservative, mostly dividend-paying stocks.

Let our portfolios guide you to the right investments for your TFSA

Canadian Wealth Advisor recommends a number of exchange-traded funds suitable for TFSA investing in its CWA ETF Portfolio. It’s one of three portfolios the newsletter offers (the other two are the Trust & REIT Portfolio and the Safety-Conscious Stock Portfolio). We continuously monitor and update all three portfolios.

You can get our all three of our Canadian Wealth Advisor portfolios, including our CWA ETF Portfolio, when you take a no-risk trial to Canadian Wealth Advisor today. Best of all, you get one issue absolutely free, plus 5 in-depth Special Reports and much more. Click here to learn how.

Tip of the week: “How to make the most of your tax free savings account”

The federal government first made the tax free savings account (TFSA) available to investors in January 2009. These accounts let you earn investment income — including interest, dividends and capital gains — tax free. You could contribute $5,000 in 2009 to start your tax free savings account.

Every year, you can contribute an additional $5,000 to your tax free savings account. If you contribute less than $5,000 to your TFSA in any given year, you can carry the difference forward. That means your TFSA contributions for 2009 and 2010 totalled $10,000, rising to $15,000 in 2011, $20,000 in 2012 and so on.

Tax-free savings accounts let you earn investment income — including interest, dividends and capital gains — tax free. But unlike registered retirement savings plans (RRSPs), contributions to TFSAs are not tax deductible. However, withdrawals from a TFSA are not taxed.

Here are three tips you can use to make sure you’re getting the most profit — and tax benefits —from your TFSA:

1. Avoid putting higher-risk investments in your TFSA: Holding higher-risk stocks in your TFSA is a poor investment strategy. That’s because high-risk stocks come with a greater risk of loss. If you lose money in a TFSA, you lose both the money and the tax-deduction value of the loss. (Outside your TFSA, you can use capital losses to offset taxable capital gains.)
   
   You’ll also lose the main advantage of a TFSA: sheltering gains from tax. You won’t have gains to shelter if the value of your investments falls.

You want to protect your "safe money" -- the part of your portfolio you're counting on for the future -- yet you want to earn more than you're getting from the bank. That's where my Canadian Wealth Advisor newsletter comes in. I'll show you several proven ways to protect and grow your safe money. Click here to learn how you can get started right away.

2. Your current income can help you decide between your TFSA and your RRSP: If funds are limited, you may need to choose between TFSA and RRSP contributions.
   
   RRSPs may be the better choice in years of high income, since RRSP contributions are deductible from your taxable income. In years of low or no income — such as when you’re in school, beginning your career or between jobs — TFSAs may be the better choice.
   
   Moreover, investing in a TFSA in low-income years will provide a real benefit in retirement. When you’re retired, you can draw down your TFSA first, then begin making taxable RRSP withdrawals.
3. Your TFSA is a good place to hold exchange-traded funds (ETFs): Even though the limit is now $15,000, it’s still difficult to build a diversified portfolio within your TFSA. Instead, look to exchange-traded funds for TFSA investing.
   
   You could pick from the carefully selected ETFs we recommend in our Canadian Wealth Advisor newsletter’s ETF Portfolio. It’s one of three portfolios the newsletter offers to conservative and income-seeking investors (the other two are the Safety-Conscious Stock Portfolio and the Safety-Conscious Income Trust Portfolio). We continually monitor and update all three portfolios.
   
   Over the years, as the value of your TFSA increases, you could switch to a portfolio of conservative, mostly dividend-paying stocks spread out across the five main economic sectors (Manufacturing & Industry, Resources, Finance, Utilities and Consumer).

Next Wednesday, April 6, 2011, Investor Toolkit will show you 3 good investor habits for long-term success.

For our latest advice on lower-risk investments suitable for your TFSA (including the exchange traded funds we recommend in our CWA ETF Portfolio), you should subscribe to our Canadian Wealth Advisor newsletter. Click here to learn how you can get one month free when you subscribe today.

Tip of the week: “These 3 powerful strategies will help you make the most of your RRSP tax shelters”

Registered Retirement Savings Plans, or RRSPs, are the best-known and most widely used tax shelters in Canada.

RRSP contributions are tax deductible, and taxes are deferred on growth in the value of investments you hold in an RRSP. You only pay taxes on RRSP withdrawals. However, RRSP tax advantages come at a cost. RRSP withdrawals are taxed as ordinary income. In an RRSP, you don’t get any benefit from the lower rate of tax on capital gains (half the rate you pay on ordinary income), and the dividend tax credit doesn’t apply to dividend income you get in an RRSP.

(Note that you can contribute up to 18% of your earned income from the previous year to an RRSP, to a maximum of $22,000). March 1, 2011, is the last day you can contribute to an RRSP and deduct your contribution from your 2010 income.

Here are 3 powerful strategies you can use to make the most of your RRSP tax shelters, both now and in the future:

RRSP Strategy #1: Stick with conservative investments in your RRSP: We advise against holding speculative investments in your RRSP. If you hold higher-risk stocks in an RRSP and they drop, you have an immediate loss in your net worth, but that’s not all. You also miss out on the tax-deduction value that you’d get if the loss occurred outside your RRSP. When you lose money in your taxable account, outside your RRSP, you can use the loss to offset taxable capital gains.

You want to protect your "safe money" -- the part of your portfolio you're counting on for the future -- yet you want to earn more than you're getting from the bank. That's where my Canadian Wealth Advisor newsletter comes in. I'll show you several proven ways to protect and grow your safe money. Click here to learn how you can get started right away.

Moreover, a loss in your RRSP also deprives you of the opportunity for tax-free compounding that the money would have enjoyed within your RRSP tax shelters. That’s particularly costly. After as little as seven years in an RRSP, the ability of an RRSP contribution to grow and compound free of tax may be worth as much as your initial contribution itself. That’s why RRSPs are a bad place for aggressive investments of any kind. The potential damage that these investments can do to the tax shelter value of your RRSP is just too costly.

RRSP Strategy #2: You can use your RRSP to defer mutual-fund taxes: Holding good-quality stocks comes with a built-in tax shelter value. That’s because you only pay capital gains taxes on stock market gains when you sell at a profit. But mutual funds have to buy and sell more often than you do, to raise money for departing investors or to invest cash from new fund buyers. At year end, mutual funds distribute any “net” capital gains (after deducting any capital losses) they have made during the year, to their unitholders.

If you hold your mutual funds outside your RRSP, you’ll have to pay capital gains tax on those capital gains distributions. That’s true even if the fund made the gains before you invested in it. But if you hold your mutual funds in an RRSP, you get to defer taxes on those capital gains until you take the money out of the RRSP.

RRSP Strategy #3: Consider early RRSP withdrawals only in years of little or no income: Making early withdrawals from your RRSP only makes sense in a year of low income, which puts you in a low income-tax bracket, and you have exhausted all other sources of cash. That may happen in years when you are ill, say, or unemployed.

On the other hand, if you have cash to invest during a year of low income, a tax-free savings account (TFSA) is a good place for it. Like an RRSP, a TFSA is a tax shelter. But unlike RRSPs, contributions to a TFSA are not deductible, and withdrawals from TFSAs are not taxable.

Investing in a TFSA in low-income years will provide a real benefit in retirement. When you’re retired, you can exhaust your TFSA first, without paying any tax, and only then begin making taxable RRSP withdrawals.

Next Wednesday, January 12, 2011, Investor Toolkit will give you our investment advice on when you should sell a stock.

You can get our latest “safe-investing” strategies for RRSP investing, as well as clear buy/sell/hold advice on lower-risk investments, in our Canadian Wealth Advisor newsletter. Best of all, you get one month free when you subscribe today. Click here to learn how.

The federal government first made tax free savings accounts (TFSAs) available to investors in January 2009. These accounts let you earn investment income — including interest, dividends and capital gains — tax free. You could contribute $5,000 in 2009 to start your tax free savings account.

Every year, you can contribute an additional $5,000 to your TFSA. If you contribute less than $5,000 to your TFSA in any given year, you can carry the difference forward. That means your TFSA contributions for 2009 and 2010 total $10,000, rising to $15,000 in 2011, $20,000 in 2012 and so on.

(Read on for a simple strategy to help you choose between your TFSA and your RRSP, and cut your tax bill in retirement.)

Exchange traded funds remain our top choice for tax free savings account investing

Even though the limit is rising to $15,000, it’s still difficult to build a diversified portfolio within your TFSA. Instead, we continue to recommend that you look to exchange traded funds, like the iShares S&P/TSX 60 Index Fund (Toronto symbol XIU), for TFSA investing.

You want to protect your "safe money" -- the part of your portfolio you're counting on for the future -- yet you want to earn more than you're getting from the bank. That's where my Canadian Wealth Advisor newsletter comes in. I'll show you several proven ways to protect and grow your safe money. Click here to learn how you can get started right away.

The fund is a recommendation of our Canadian Wealth Advisor newsletter. Its units are made up of stocks that represent the S&P/TSX 60 Index, which consists of the 60 largest, most heavily traded stocks on the exchange. Most of the stocks in the index are high-quality companies.

The exchange traded fund’s units trade on the Toronto exchange, just like stocks. Prices are quoted in newspaper stock tables and online. You’ll have to pay brokerage commissions to buy and sell them, but you will quickly make these back because of the low management fees, which are just 0.17% of the fund’s assets.

Over the years, as the value of your TFSA increases, you could switch to a well-diversified portfolio of conservative, mostly dividend-paying stocks.

How to choose between RRSPs and TFSAs

Unlike RRSPs, TFSA contributions are not tax deductible. However, withdrawals from a TFSA are not taxed.

RRSPs may be the better choice in years of high income, since RRSP contributions are deductible from your taxable income. In years of low or no income — such as when you’re in school, beginning your career or between jobs — TFSAs may be the better choice.

Investing in a TFSA in low-income years will provide a real benefit in retirement. When you’re retired, you can draw down your TFSA first, then begin making taxable RRSP withdrawals.

If you’re looking for safety-conscious investment strategies like this, you should subscribe to Canadian Wealth Advisor. Click here to learn how you can get one month free when you subscribe today.

You can make tax-free withdrawals from your TFSA at any time. You can put the money back in, as well, but the main limitation here is that you have to wait until the next calendar year to do so. That’s where many of these 70,000 investors ran afoul of the TFSA rules.

Penalties stem from confusion about rules surrounding tax free savings accounts

The federal government first made TFSAs available to investors in January 2009. These accounts let you earn investment income — including interest, dividends and capital gains — tax free. However, you could only contribute $5,000 in 2009 to start your tax free savings account.

Every year, you gain an additional $5,000 of contribution room in your TFSA. That means you have $10,000 of contribution room in 2010, rising to $15,000 in 2011, $20,000 in 2012 and so on. You also get to carry forward unused contribution room from previous years.

In the over-contribution example, say you made the maximum $5,000 contribution when TFSAs were first introduced in January 2009. Three months later, in April 2009, you withdrew $2,500 to pay for a family vacation. The earliest you could have put this $2,500 back into your TFSA would have been January 1, 2010. If you put it back sooner, you would have to pay a 1% per month penalty, even if you stayed below your 2009 contribution limit of $5,000.

To take this example further, you could put a total of $7,500 into your TFSA after January 1, 2010 ($5,000 for your annual 2010 contribution and the $2,500 withdrawal you made in 2009).

You want to protect your "safe money" -- the part of your portfolio you're counting on for the future -- yet you want to earn more than you're getting from the bank. That's where my Canadian Wealth Advisor newsletter comes in. I'll show you several proven ways to protect and grow your safe money. Click here to learn how you can get started right away.

Use caution when transferring funds between tax-free savings accounts

Another condition that trapped many investors is that, under the current TFSA rules, you can’t withdraw money from one TFSA and use this cash to open another TFSA at another bank or financial institution within the same year. If you do, the amount you contribute to the new plan is also considered an over-contribution.

In order to avoid a penalty, you must ensure that your financial institution transfers your funds from one TFSA to another directly.

Look to lower-risk investments for TFSA investing

Despite the confusion, we continue to think TFSAs are well worth investing in. To make the most of your TFSA investing, we think you are best to hold lower-risk investments in these accounts. That’s because you don’t want to suffer big losses in your TFSA. If you do, you can’t use those losses to offset capital gains. You’ll also lose the main advantage of a TFSA: sheltering gains from tax. You won’t have gains to shelter if the value of your investments falls.

Even though you have $10,000 of contribution room in 2010, it’s still difficult to build a diversified portfolio within your tax free savings account. Instead, we continue to recommend that you look to index funds, like the iShares Cdn Large Cap 60 Index Fund (Toronto symbol XIU), for TFSA investing.

The fund is a recommendation of our Canadian Wealth Advisor newsletter. Its units are made up of stocks that represent the S&P/TSX 60 Index, which consists of the 60 largest, most heavily traded stocks on the exchange. Most of the stocks in the index are high-quality companies.

The units trade on the Toronto exchange, just like stocks. Prices are quoted in newspaper stock tables and online. You’ll have to pay brokerage commissions to buy and sell them. However, the fund’s management expense ratio (MER) is just 0.17% of its assets.

Over the years, as the value of your TFSA increases, you could switch to a well-diversified portfolio of conservative, mostly dividend-paying stocks.

If you’re looking for safety-conscious investment strategies like this, you should subscribe to Canadian Wealth Advisor. Click here to learn how you can get one month free when you subscribe today.

Tax-free savings accounts let you earn investment income — including interest, dividends and capital gains — tax free. But unlike registered retirement savings plans (RRSPs), contributions to tax free savings accounts are not tax deductible. However, withdrawals from a TFSA are not taxed.

Here are three tips you can use to make sure you’re getting the most profit — and tax benefits —from your tax free savings account:

1. Keep higher-risk investments out of your TFSA: Holding higher-risk stocks in your TFSA is a poor investment strategy. That’s because high-risk stocks come with a greater risk of loss. If you lose money in a TFSA, you lose both the money and the tax-deduction value of the loss. (Outside your TFSA, you can use capital losses to offset taxable capital gains.)

You’ll also lose the main advantage of a TFSA: sheltering gains from tax. You won’t have gains to shelter if the value of your investments falls.

You want to protect your "safe money" -- the part of your portfolio you're counting on for the future -- yet you want to earn more than you're getting from the bank. That's where my Canadian Wealth Advisor newsletter comes in. I'll show you several proven ways to protect and grow your safe money. Click here to learn how you can get started right away.

2. Let your current income help you decide between your tax free savings account and RRSPs: If funds are limited, you may need to choose between TFSA and RRSP contributions.

RRSPs may be the better choice in years of high income, since RRSP contributions are deductible from your taxable income. In years of low or no income — such as when you’re in school, beginning your career or between jobs — TFSAs may be the better choice.

Moreover, investing in a TFSA in low-income years will provide a real benefit in retirement. When you’re retired, you can draw down your TFSA first, then begin making taxable RRSP withdrawals.

3. Consider holding exchange-traded funds in your TFSA: Even though the limit is now $10,000, it’s still difficult to build a diversified portfolio within your TFSA. Instead, look to exchange-traded funds for TFSA investing.

We recommend a number of carefully selected exchange-traded funds in our Canadian Wealth Advisor newsletter. You get a subscription to Canadian Wealth Advisor, along with our other three investment publications, when you become a member of Pat McKeough’s Inner Circle.

Stick with our picks for long-term TFSA investing

Over the years, as the value of your TFSA increases, you could switch to a portfolio of conservative, mostly dividend-paying stocks spread out across the five main economic sectors (Manufacturing & Industry, Resources, Finance, Utilities and Consumer).

You could pick from the stocks we recommend in our newsletters, including the 19 companies in Canadian Wealth Advisor’s Safety-Conscious Stock Portfolio. It’s one of three portfolios the newsletter offers to conservative and income-seeking investors (the other two are the Index Fund and ETF Portfolio and our Safety-Conscious Income Trust Portfolio). We continually monitor and update all three portfolios.

Members of Pat McKeough’s Inner Circle get Canadian Wealth Advisor and our other three publications: The Successful Investor, Wall Street Stock Forecaster and Stock Pickers Digest, every month. Plus, you get to ask us about stocks or other types of investments you’re considering buying (or selling). Click here to learn more.

A similar pitfall exists during the end-of-the-year rush to take advantage of certain tax shelters, including charitable donations. In our view, you should be as selective about giving money to charity as you are about buying stocks. In fact, bad charities tend to have something in common with bad stocks.

Examine a charity’s “business plan” before donating

Bad stocks devote much of their effort to promoting their stock prices, and overplay progress they make in their businesses. Similarly, bad charities devote the bulk of their budgets to fundraising and administration costs, while touting the limited charitable work they do.

The first thing to look at when evaluating charitable-donation tax shelters is the proportion of a charity’s budget that goes to fundraising and administration. (You can get financial information for Canadian registered charities through the Canada Revenue Agency’s web site.)

You also need to look at what you might call the charity’s “business plan.” Does it make sense? Is the charity equipped to pursue its objective in an effective, efficient manner? If not, other charitable organizations may be able to put your donation to better use.

One sound investing rule is that if you have any doubts about the integrity of a company’s insiders, you should stay out of the stock. You should apply the same rule to tax shelters, including charities. Some charities “cook the books” to make themselves look more deserving.

You want to protect your "safe money" -- the part of your portfolio you're counting on for the future -- yet you want to earn more than you're getting from the bank. That's where my Canadian Wealth Advisor newsletter comes in. I'll show you several proven ways to protect and grow your safe money. Click here to learn how you can get started right away.

For instance, one seemingly reputable charity once revealed that it had cut the proportion of its budget that it devotes to fundraising by simply reclassifying part of its telemarketing costs as a public-education service.

Donating stocks is a great way to maximize your charitable-donation tax shelters

There is now a way to donate funds you hold in shares of publicly traded companies that not only maximizes the donation for the charity, but lets you pay no capital gains taxes. This change came into effect as a result of the May 2006 federal budget.

This amounts to a double benefit for investors. When you donate stocks or mutual funds directly to a charity, you get a tax credit on the entire value of the shares. Plus, any capital gains you recognize on these investments are tax free.

Let’s look at an example: say you bought 1,000 shares of Royal Bank at $20 per share, and when you decide to donate your holding, the stock has climbed to $50.

If you decide to sell the shares first and donate the proceeds to charity, your profit, or capital gain, on the sale would be $30,000.

You only pay tax on 50%, or $15,000, of your capital gain. If you live in Ontario, say, and are in the highest income-tax bracket, your tax rate would be 46.41%, so you would owe $6,962 in capital-gains tax, leaving you with a total donation of $43,038, for which you would receive a tax credit of roughly $19,974.

However, if you are in the same tax bracket and donate the shares directly, you will receive a tax credit on the entire value of the shares at the 46.41% tax rate, for a total of $23,205, and at the same time avoid paying taxes on the accumulated capital gains. And the charity would receive the entire value of the shares ($50,000).

If you have investment questions about tax shelters or other investment issues, or if you’d like to ask me about stocks you’re considering buying (or selling), you should join my Inner Circle service. Click here to learn more.

Every year, you gain an additional $5,000 of contribution room (indexed to inflation and rounded to the nearest $500 on a yearly basis). Plus, you get to carry forward unused contribution room from previous years. So in 2010 you’ll have $10,000 of contribution room, $15,000 in 2011, and so on.

(Read on for a simple strategy to help you choose between your TFSA and your RRSP, and cut your tax bill in retirement.)

Index funds are tailor made for your tax free savings account

Even though the limit is rising to $10,000, it’s still difficult to build a diversified portfolio within your tax free savings account. Instead, we continue to recommend that you look to index funds, like the iShares Cdn Large Cap 60 Index Fund (Toronto symbol XIU), for TFSA investing.

You want to protect your "safe money" -- the part of your portfolio you're counting on for the future -- yet you want to earn more than you're getting from the bank. That's where my Canadian Wealth Advisor newsletter comes in. I'll show you several proven ways to protect and grow your safe money. Click here to learn how you can get started right away.

The fund is a recommendation of our Canadian Wealth Advisor newsletter. Its units are made up of stocks that represent the S&P/TSX 60 Index, which consists of the 60 largest, most heavily traded stocks on the exchange. Most of the stocks in the index are high-quality companies.

The units trade on the Toronto exchange, just like stocks. Prices are quoted in newspaper stock tables and online. You’ll have to pay brokerage commissions to buy and sell them, but you will quickly make these back because of the low management fees, which are just 0.17% of the fund’s assets.

Over the years, as the value of your TFSA increases, you could switch to a well-diversified portfolio of conservative, mostly dividend-paying stocks.

RRSPs or TFSAs: Which should you invest in now?

Unlike RRSPs, TFSA contributions are not tax deductible. However, withdrawals from a TFSA are not taxed.

RRSPs may be the better choice in years of high income, since RRSP contributions are deductible from your taxable income. In years of low or no income — such as when you’re in school, beginning your career or between jobs — TFSAs may be the better choice.

Investing in a TFSA in low-income years will provide a real benefit in retirement. When you’re retired, you can draw down your TFSA first, then begin making taxable RRSP withdrawals.

If you’re looking for safety-conscious investment strategies like this, you should subscribe to Canadian Wealth Advisor. Click here to learn how you can get one month free when you subscribe today.

Flow-through funds mainly invest in flow-through shares issued by junior mining and oil companies. The companies spend the money they receive for these shares on mineral exploration and development, which carries certain tax benefits, in the form of tax credits and tax deferral.

These tax benefits “flow through” to investors in the fund. To take advantage of them, investors need to hang on to the funds for a fixed time, usually 18 months to two years. At the end of that period, flow-through funds convert into standard mutual funds. These tax shelters developed out of a Canadian government plan to encourage natural resource exploration and development.

Tax shelters: A typical flow-through fund by the numbers

For example, an investor in the 50% tax bracket buying $10,000 of a flow-through fund would save $5,000 on income taxes over two years.

That would make the effective cost of the investment $5,000. If the investor later sold the units for $6,200, they would pay capital gains tax of $1,550 ($6,200 times the 50% capital gains inclusion rate, times the 50% tax rate). That would leave a net gain of $5,000. That, plus the $5,000 in tax savings, would be a break-even amount of $10,000.

In other words, the tax shelter could drop 38% and you’d still break even. However, you’d have nothing to show for your investment.

You want to protect your "safe money" -- the part of your portfolio you're counting on for the future -- yet you want to earn more than you're getting from the bank. That's where my Canadian Wealth Advisor newsletter comes in. I'll show you several proven ways to protect and grow your safe money. Click here to learn how you can get started right away.

If the investment sold for more than $6,200 (having originally invested $10,000 in the flow-through fund) then that would be profit (less capital gains taxes).

There is the added benefit that you get the tax reduction in the current year, and you only pay the capital gains taxes in the year you sell the fund.

Flow-through tax shelters are riskier than many investors realize

The problem with tax shelters like these is that the government only provides the tax benefits to persuade you to make a risky investment that you wouldn’t otherwise make. However, some of the benefits go to pay the fund’s organizers and the brokers. What’s left over may not be enough to pay you for taking on the extra risk.

(Instead of flow-through funds, we think you would be better off investing in one of the resource funds we recommend in our new special report, “Mutual Funds Canada: Inside the Top 10 Canadian Mutual Funds.” Click here for further details.)

Oil and mining stocks have moved up with a recovering global economy. However, flow-through investments may be less rewarding in the next year or two. If resource prices level off or fall, the market in junior-resource stocks could slump deeply, wiping out all the benefits for flow-through investors. You could wind up losing on the deal, even with the tax advantages.

As well, keep in mind that most flow-through issuers are junior companies that are short on financing, or that don’t have enough income to make full use of the tax benefits associated with their exploration. That’s why they sell these shares to investors.

RRSPs, TFSAs the best tax shelters for most Canadian investors

The federal government has eliminated many tax shelters over the years. But there are still a number of highly effective ways for Canadians to cut their tax bills, such as RRSPs, Tax-Free Savings Accounts (TFSAs), and Individual Pension Plans (IPPs).

Another highly effective way to cut your tax bill is to buy high-quality stocks on margin. That’s because you’ll be able to write off your margin interest in full against ordinary income in the current year. However, you’ll pay less than ordinary income-tax rates on dividends from Canadian stocks, thanks to the dividend tax credit. In addition, you only pay capital gains tax on a stock when you sell, or “realize” the increase in the value of the stock over and above what you paid for it.

You could only invest $5,000 this year to start your TFSA. However, you gain an additional $5,000 of contribution room (indexed to inflation and rounded to the nearest $500 on a yearly basis) every year, plus you get to carry forward unused contribution room from previous years. (So in 2010 you’ll have $10,000 of contribution room, $15,000 in 2011, and so on.)

Use your tax free savings account to complement your RRSP

Your TFSA can generally hold the same investments as an RRSP. This includes cash, mutual funds, publicly traded stocks, GICs and bonds.

Contributions are not tax deductible, as they are with an RRSP. However, withdrawals from a TFSA are not taxed. This makes the TFSA a good vehicle for more short-term savings goals.

You want to protect your "safe money" -- the part of your portfolio you're counting on for the future -- yet you want to earn more than you're getting from the bank. That's where my Canadian Wealth Advisor newsletter comes in. I'll show you several proven ways to protect and grow your safe money. Click here to learn how you can get started right away.

If funds are limited, you may need to choose between RRSP and TSFA contributions. RRSPs may be the better choice in years of high income, since RRSP contributions are deductible from your taxable income. In years of low or no income — such as when you’re in school, beginning your career or between jobs — TFSAs may be the better choice.

Investing in a TFSA in low income years will provide a real benefit in retirement. When you’re retired, you can draw down your TFSA first, then begin making taxable RRSP withdrawals.

Hold low-risk investments in your tax free savings account

We think you are best to hold lower-risk investments in your TFSA. That’s because you don’t want to suffer big losses in these accounts. If you do, you can’t use those losses to offset capital gains. You’ll also lose the main advantage of a TFSA: sheltering gains from tax. You won’t have gains to shelter if the value of your investments falls.

Since this is the first year TFSAs have been offered, the $5,000 limit means you can’t yet build a diversified portfolio within these accounts. That’s why you are best to hold lower-risk and low-fee equity investments. These include interest-bearing investments, like high-yield savings accounts such as those from President’s Choice Financial or ING Direct, or index funds.

A tax free savings account-friendly index fund

One example of a suitable index fund is the iShares Cdn Large Cap 60 Index Fund (Toronto symbol XIU), which we follow in our Canadian Wealth Advisor newsletter. The fund’s units are made up of stocks that represent the S&P/TSX 60 Index, which consists of the 60 largest, most heavily traded stocks on the exchange. Most of the stocks in the index are high-quality companies.

The units trade on the Toronto exchange, just like stocks. Prices are quoted in newspaper stock tables and online. You’ll have to pay brokerage commissions to buy and sell them, but you will quickly make these back because of the low management fees, which are just 0.17% of the fund’s assets.

Take the long view with TFSAs

Over the years, as the value of your TFSA increases, you could switch to a well-diversified portfolio of conservative, mostly dividend-paying stocks, or mutual funds that hold those stocks.