Are you are one of the 6 million Canadians who have opened a TFSA? Have you wondered what their real purpose is? If so, you are probably one of the 5 million+ people who are quietly asking this question. When this program was introduced in 2009 by Finance Minister Jim Flaherty, it was intended to encourage investment into Canada’s technology sector. This sector has been starving for investment with much of the innovation either floundering or being sold off to US and other countries at pennies on the dollar. It was thought that a TFSA type of plan would reverse this experience. 6 years later and over $72 billion has accumulated in these plans, the result is a mitigated disaster. Almost all of this $72 billion is languishing in GIC type accounts earning 1% to 2%.
What on earth happened?
Canada's TFSA program is massively misunderstood by both the 6 million Canadians and the financial institutions that are licensed to take your money.
Let me give you an example:
About a year ago, a dear friend visited us at our new home in BC. He had recently lost his wife and this was the first time we were able to get together since his loss. After his visit I decided to accompany him on the 12 hour drive back to Alberta.
I knew he wanted to talk about his wife’s estate issues and this would be a good chance to do that without any distractions. After a while in the vehicle, he mentioned the 2 of them had TFSA’s and that he was able to transfer her plan into his name with little difficulty. A while later he mentioned he had just moved all of his TFSA money from one bank to another as the new bank was offering a better interest rate.
Several miles later, we talked about a mutual friend and he told me our friend had recently bought controlling interest in a silver mine and the prospects were looking very promising. He said he had bought $10,000 worth of shares in the Company. I asked him what our friend thought the shares would rise to if the assay work proved successful. Not surprising, he told me he had paid $0.20 per share and they could rise to $2.00. A nice tidy profit I would say!
I then asked him if he had purchased the shares in his TFSA account?
His reply astonished me. He said “you can’t do that”! My reply was “oh yes you can, and not only can you, they were designed to do just that”.
There was about 5 minutes of silence. I could tell his reaction was “my financial advisor didn’t tell me this”.I went on to explain the tax implication of a profit like this.
$10,000 at $0.20 would yield $100,000 if sold for $2.00, showing a profit of $90,000: The tax on that would be as much as $45,000.
If you were able to qualify this as a capital gain, then only half of the profit (or $45,000) would be taxed. This is still $20,000 to $22,500 of tax to pay.
If he bought this through his TFSA, the tax would be ZERO.
Why don’t people (and their financial advisors) know this?
Although the intent of creating TFSA was not to invest in silver mines, silver mines do qualify; and so do hundreds of other investments. Yet we have virtually all of this money ($72+ billion) languishing in low interest GIC type accounts with the technology sector still starving.
TSFAs - Good Idea , but Bad Implementation What we have done is place this money in the hands of financial institutions that are ill equipped to direct investment into any industry, let alone the poorly structured technology sector. We need to fix this. There are 2 primary reasons that make the existing financial institutions poor choices for holding TFSA money:
1. The existing institutions specialize in debt. A TFSA used properly should be invested in equities.
2. The existing institutions specialize in tangible assets. A TFSA used properly should be invested in companies that are rich in intangible assets.
Just my opinion here, but TFSA money should be your risk-taking fund (a.k.a. like my friend and the silver mine shares). I know as we age, our official opinion is that our risk taking days are behind us, yet I see a lot of grey hair at bingo parlours, casinos, and lottery line-ups. So officially grey hairs don’t take risks or gamble, but in reality this age sector can kick up its heels with the best of them.
Here are a few thoughts to keep in mind when you get your next TFSA statement:
1. Do not take your bank/financial institutions’ advice blindly. Their intentions are to place your TFSA money in financial products that nefariously benefit them the most.
2. Change your opinion about what your TFSA goals are. Think of this money as your “risk” fund and use it to gamble a bit. Remember if the gamble works, the reward is TAX FREE.
3. Consider that this money may be used in a technology that has a direct societal benefit. Priorities like health care/cure, energy efficiency, recycle/renewal, etc. will give you the satisfaction that your money may help solve one of our current and future problems. If the gamble works, you will get a sizeable (tax free) reward. If the gamble does not work, you will have contributed something to science.
4. Do your homework. It is your money.
Joe Batty, CA
If you want more information on how to self-direct your TSFA or RRSP or would like to contact Joe
for any reason, send a message to Joe from our ‘contact’ page
Several weeks ago, Alberta Premier Jim Prentice travelled to Toronto and New York to garner interest in the pipeline and investment in Alberta. This kind of rhetoric usually gets a bit of press, but little is retained by the general public for more than a few days. These topics seem so far away from everyday peoples’ lives that it simply becomes background noise.
Should everyday people be interested?
Of course that depends. It is everyone’s choice about what how they spend their time reading, reviewing and/or studying. Considering we do live in an open society, there are some responsibilities each citizen is expected to assume in order for our society to operate effectively. So perhaps from that point of view, everyday people should show some interest in this kind of initiative.
I hope after you read this article, you may become interested in this subject. If I were in the audience, here is how I would see the exchange:
The Alberta Premier stands “hat in hand” in front of the Toronto Board of Trade or a group of Wall Street investment bankers and sings the songs of praise for Alberta’s frontier investment opportunities. He points out some facts that purport to show that any money invested in Alberta is relatively safe and will provide the investors with substantial returns and/or profits.
A question comes from the floor:
"Why should someone from Toronto or New York invest in Alberta if Alberta and Albertans will not invest in Alberta?"
Obviously the Premier will not have an answer to this question. All of his briefings have suggested that if you want money to flow into the Alberta economy, you must go east to where the Centre’s of capital are. Supposedly these are the people who control the money supply so you must go there and beg for their help and cooperation.
I doubt if this actually happened; probably most of the people in the audience would have politely applauded and went back to their offices and quickly forgot the plea. So what is this all about?
What we have here is a great dichotomy:
The Premier is asking non-Albertans to spend some of their investment money in Alberta
Alberta’s public sector institutions and Albertans’ savings accounts and RRSP’s/TFSA’s have massive amounts of money invested around the world, yet virtually none of this money is invested in or directed to the Alberta economy. Here are 5 examples (and there are many more) of the entities that hold or manage these massive amounts of money:
AIMCo. (Alberta Investment Management Corp) – this crown corporation manages the Alberta Government and Local Authorities Pension plans and the holdings of several other trusts and fund like the Alberta Heritage Trust Fund and the Alberta Heritage Foundation for Medical Research Trust Fund
Investment assets $81 billion
ATRF (Alberta Teachers Retirement Fund) – this independent public corporation manages the Alberta Teachers pension plan
Investment assets $11 billion
City of Edmonton – the City of Edmonton established a legacy fund created from the sale of Edmonton Telephones.
Investment assets $ 1.4 billion
Albertans’ TFSA accounts – savings that have been registered in Tax Free Savings Accounts since 2009
Investment assets $20+ billion
Albertans’ RRSP accounts – savings that have been registered in RRSP’s since 1957
Investment assets $150+ billion
Cumulatively this totals over $263.4+ billion
In these 5 examples, there is over ¼ trillion dollars sitting in investment accounts. Is it fair to that there is no shortage of money in Alberta?
The dichotomy (and the travesty) is that virtually none of this money is currently being directed to fulfill the needs that the Premier has described. So why does the Premier go “hat in hand” and beg for help to the “bankers” in Eastern Canada and USA? Wouldn’t you think he could simply walk across the street and ask the folks who manage these massive caches of money to direct some of it toward the needs he has identified?
So what is missing?
As I wrote in my article titled “It’s your Money” (see Investment Advice), “people (in droves) have yielded their decisions about their money to the new army of “investment advisors” that populate our financial institutions”. I can easily say the same condition exists with the people who manage the massive funds I listed above.
Metaphorically speaking we (collectively) need to get our heads out of the sand. If there are investment opportunities in Alberta, surely the first people who should get the right to invest in them should be Albertans and the funds that hold these massive amounts of money (in trust) for Alberta? One of my close friends mentioned how disgusted he was that Syncrude sold off a large portion of their equity to an Asian based investment group. He asked me why Syncrude’s equity wasn’t offered to Albertans first. What’s missing is a process and the infrastructure to do just this.
Would Albertans invest in Alberta? Of course they would if they had the confidence that the projects and companies that were presented had promising futures. Any such solution to this dilemma must be built locally and managed locally.
We really need to get this done, and get it done right. There are 2 compelling reasons to resolve this issue quickly:
It could mitigate the boom/bust nature of our economy. Otherwise this boom/bust will plague us over and over.
It could give Albertans an “Alberta return on their money”. What better way to show patriotism and reward?
Other than our group, I don’t know of anyone else working on this problem. If you would like to know more or if you have any questions, go to www.proventurespathway.com or e-mail me at firstname.lastname@example.org.