By Jon Oko and Harvey Kraft
For many Canadians, Registered Retirement Savings Plans (RRSPs) comprise a significant portion of their overall financial portfolio and are a main source of retirement savings, either as their primary retirement vehicle, or to supplement a retirement program provided by an employer, due to their ability to permit the investment of pre-tax earnings to generate returns that are not taxed until required for personal use.
Similarly, Tax Free Savings Accounts (TFSAs) are becoming an important long-term savings tool for individuals, and are another tax-preferred account for Canadian investors. As of January 1, 2009, TFSAs allow for the ability to compound investment returns on a pre-tax basis, and while contributions to a TFSA are not tax-deductible (as they are for RRSPs), investment income generated is not taxed either when earned, or withdrawn, from the account.
From Statistics Canada we can get some basic information about Canadians in retirement. Personal savings for retirement constituted almost one-third of total family assets in 2005. The most common holding was mutual funds (38%), likely due to the broad range of products available. Guaranteed investment certificates (GICs) were the second most popular, with 20% of families holding them. At the other end of the RRSP investment spectrum, only 7% of families held stocks. The majority (59%) of families held their entire RRSP portfolios in variable-value assets (mutual funds, stocks or bonds). Only one-quarter held assets with predictable values (GICs, Canada Savings Bonds, or treasury bills exclusively).
Canadian investors are unaware of the potential variety of investments they can hold in their tax preferred accounts. While the types of investments that can be made through an RRSP or TFSA (or even an RESP) have limitations, what qualifies for these plans is still quite extensive. Regulation 4900 of the Income Tax Act (Canada) prescribes what a qualifying investment is for both RRSPs and TFSAs and includes more than just stocks and bonds of public companies, or units of mutual funds; a variety of innovative investments can qualify.
Investment in private mutual fund trusts, syndicated and standard mortgages, mortgage investment corporations, and even Canadian controlled private corporations are eligible for RRSPs, TFSAs and other registered plans held by trustees such as Olympia Trust Company (OTC). It is important to note that just because an entity is not listed on a stock exchange does not mean an investor cannot hold that investment in his/her RRSP or TFSA. While these types of investments qualify, non-listed investments, if structured properly in compliance with Regulation 4900 of the Income Tax Act (Canada), can also qualify.
For example, there are about a dozen or so public medical marijuana manufacturers on the Canadian public stock exchanges, but did you know that you can also invest in this high potential business through the exempt market? I have reviewed three issuers this year that are working on their government licensing. The investor in these CCPC structures can use their RRSP, TFSA or other registered plan to buy shares in these companies. In the future it would be legal in Canada to have your retirement funded by marijuana stock dividends paid by these companies to your retirement accounts. Who would have figured a few years ago?
Some other innovative examples of private enterprise that are using the CCPC structure in the exempt market are optical retailing, food testing, packaged food retailing, cloud computing, medical surgical supplies and software design for social networks. In all these examples you the investor are using your retirement accounts to hold shares in these growth opportunities. The only difference you presently have from the public ownership of these shares is that there is no established exchange for liquidity. The investor usually invests ‘patient money,’ that is in for the longer cycle of business growth.
A popular way to invest in the booming Ontario condo market is to use your tax-preferred accounts to invest in syndicated mortgages which serves as another example of non-traditional RRSP investments. Double digit annual returns have been achieved with the additional security of being on title. Another way to get into mortgage investing in your retirement accounts is through investing in Mortgage Investment Corporations (MICs) shares. They are a hugely popular exempt market structure that can also achieve much higher regular dividend yields than the interest yield on Bonds, GIC’s and Bank savings accounts.
Mutual Fund Trusts (MFTs) are a fairly large issuer structure that can allow the Canadian registered account holder the opportunity to invest in opportunities such as U.S. Sunbelt projects. The MFT units would be held in your retirement account with the anticipated distributions based on the performance of the U.S. real estate asset. Wrap around LP structures are used to accommodate investment in some hot commercial properties in the U.S. Steady income with real estate geographical diversification.
PUBCO’s are another similar type of structure to this MFT concept that are frequently used to invest in large real estate projects. The largest land banking company in Canada has used this structure for more than 10 years to invest in real estate in North America, and to achieve audited attractive yields for their registered account customers.
For information on specific product options available, speak with a registered exempt market Dealer or Dealing Representative.
The Exempt Market offers Retail Investors many non-traditional investment opportunities that can equal or exceed stock market dividend yields. This patient money can be diversified over many structures that could be significantly less volatile than the present public stock markets.
Jon Oko is a partner in the assurance and business advisory group at Grant Thornton in Edmonton. He has over 13 years of experience in public accounting, providing accounting, tax and advisory services to clients in both the private and exempt market sectors.
Harvey has been in the securities industry for 11 years in various senior compliance roles. The last 4 plus years have been with Olympia Trust as the review officer managing the exempt market private issuer approval process. His career in the industry started with a 2 year articling period with the prestigious Alberta Securities Commission. Harvey is a CPA, CA with successful completion of the Exempt Market Products, OPD, and CSC Courses.