Should my emergency fund go in a high-interest savings account or a TFSA?

In an ideal state of personal finance, you have a tax-free savings account filled with investments and a separate savings account for your emergency fund.
TFSAs allow for tax-free growth and withdrawals of your money, a feature that provides the most benefit when you hold stocks and bonds as opposed to savings. A diversified portfolio of investments might generate returns of 6 per cent on an average annual basis after fees, while savings accounts paid as much as 4.2 per cent as of late this week and frequently less than 2 per cent.
This background is offered as a preamble to answering a question from a reader about whether to put her emergency fund in a regular high interest savings account or a savings account held in a TFSA. Leave the TFSA for investments, right?
Ideally, yes. But many people have plenty of unused TFSA room that can accommodate some investments and savings. Having savings in the TFSA means you keep all the interest you’re paid instead of giving up a big chunk in taxes. Remember, interest is taxed like regular income in non-registered accounts, unlike dividends and capital gains.
I often hear investment industry people and advisers scoff at the word “savings” in tax-free savings account, as if only know-nothings would use a TFSA for savings. But the latest data on TFSA holdings, for 2020, show that the average unused contribution room among TFSA holders was $40,782. Yes, these people would be best served in filling up that room with investments. But if that’s not going to happen, then savings are a fine use of a TFSA.
Almost all banks offering a competitive savings rate have a TFSA option for customers and, in some cases, the TFSA rate is a bit better. EQ Bank offered 2.5 per cent on regular savings recently, and 3 per cent for TFSA accounts, while Hubert Financial offered 3.35 per cent for regular savings and 3.4 per cent for TFSAs.
One thing to be aware of right now with all savings accounts, TFSA and otherwise, is that rates are edging lower. Expect each drop in the Bank of Canada’s overnight rate to be reflected in savings rates.
– Rob Carrick, Globe and Mail personal finance columnist
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Ask Globe Investor
Question: I haven’t seen many articles about SmartCentres Real Estate Investment Trust (SRU.UN) recently. During the COVID-19 pandemic in 2020, you wrote that SmartCentres “skipped its regular annual distribution increase this year but … I’m willing to cut it some slack in these extraordinary times.” I am interested in your current patience level with this REIT considering it has not increased its dividend since 2019 and the unit price has performed poorly.
Answer: I’m still holding SmartCentres, both personally and in my model Yield Hog Dividend Growth Portfolio, and I have no plans to sell. As much as I share your disappointment with the performance of the units and the lack of a distribution increase, I believe SmartCentres is a well-managed REIT that has been hurt by circumstances largely beyond its control, and that the future will be brighter than the recent past.
Like other REITs, SmartCentres was blindsided by the pandemic, which caused vacancies and rent delinquencies to spike in its real estate portfolio. It was also bruised by the subsequent sharp rise in interest rates, which raised borrowing costs and compressed valuations for REITs and other interest-sensitive sectors.
However, unlike many of its retail-focused peers, including RioCan REIT (REI.UN) and H&R REIT (HR.UN), SmartCentres did not cut its payout during the pandemic.
As a result, investors have continued to collect their monthly distributions, even as SmartCentres’ units have tumbled more than 30 per cent from levels before the pandemic. Reflecting that substantial drop, the units now yield about 8 per cent. Such a high yield might make some investors nervous, but analysts say SmartCentres’ distribution appears to be safe now that the pandemic has faded, in-person shopping is back and the REIT is on an increasingly solid financial footing.
In the first quarter, SmartCentres’ payout ratio fell to about 95 per cent of adjusted funds from operations (AFFO), down from 100 per cent a year earlier. AFFO is a real estate measure of cash flow that takes into account maintenance capital expenditures and other costs, and it is therefore one of the preferred metrics for determining distribution sustainability.
“While still elevated and notably higher than its peer group average, we believe such an improvement [in the payout ratio] should alleviate much of the concerns investors had over the sustainability of the distribution,” Dean Wilkinson, an analyst with CIBC World Markets, said in a recent note to clients.
Some of SmartCentres’ other financial measures also improved during the most recent quarter, reflecting strong demand for retail space. Notably, same-property net operating income – a key measure of profitability – rose by 3 per cent, driven by contractual rent escalations in existing leases and higher rental rates on renewals. While occupancy slipped by about 0.8 percentage points from the previous quarter to 97.3 per cent, reflecting the departures of two unrelated tenants, SmartCentres said it expects to re-lease the space in the next couple of quarters at higher rental rates.
As a growth-oriented REIT, SmartCentres has a couple of key advantages.
First, its retail portfolio consists largely of strong, national chains that sell essential products. Its biggest tenant, by far, is Walmart Inc. which accounts for nearly one quarter of the REIT’s gross rental revenue. Other major tenants include Loblaw Cos. Ltd., Sobeys Inc., Dollarama Inc., TJX Companies Inc. (parent of Winners, Marshalls and HomeSense) and Canadian Tire Corp. Ltd. These tenants provide a highly stable source of cash flow.
Second, SmartCentres has been diversifying into other types of real estate, including residential condos and rental apartments, retirement residences, self-storage facilities and industrial properties. The REIT also has an extensive bank of land, which, in addition to providing a platform for development opportunities, can be tapped for sale if the SmartCentres wants to raise cash to support development projects or to strengthen its balance sheet.
The latter would likely be received favourably by investors, analysts say.
SmartCentres’ carries a relatively high debt load, at roughly 9.8 times adjusted EBITDA (earnings before interest, taxes, depreciation and amortization). That compares with an average of about 7.7 times for its retail REIT peers, Lorne Kalmar, an analyst with Desjardins Securities, said in a note. Failing to narrow that gap would likely put pressure on SmartCentres’ valuation, “particularly in combination with its elevated payout ratio,” Mr. Kalmar said.
On SmartCentres’ first-quarter conference call, chief executive officer Mitchell Goldhar signalled that the REIT is open to using its land portfolio strategically. “We will execute on some limited capital recycling in unutilized lands to assist with debt reduction and development costs funding, the pace of which would depend on the market,” Mr. Goldhar said.
Another thing that would likely give the unit price a lift is continued easing by the Bank of Canada, particularly if it is accompanied by falling bond yields. REITs are among the most interest-sensitive securities, and lower rates would likely provide a tailwind for the entire sector.
Given the strong demand for SmartCentres’ commercial real estate, the REIT’s extensive development pipeline and its improving financial metrics, selling the units now – when they are trading at levels similar to the early days of the pandemic – would be a mistake. If anything, long-term investors might consider buying while the units are still relatively cheap, analysts say.
“We see current levels as a discounted entry to a name with defensive retail assets and significant value creation levers, supported by a well-tested development platform,” Pammi Bir, an analyst with RBC Dominion Securities, said in a research note.
As always, do your own due diligence before investing in any security, and be sure to maintain a well-diversified portfolio to control your risk.
– John Heinzl (E-mail your questions to [email protected])
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Compiled by Globe Investor Staff