Use TFSA billions to invest in small business: group
• Canadians have amassed $151.6 billion in the tax- free savings accounts and a Montreal groups says Ottawa needs to l oosen guidelines to allow that cash to be invested in small businesses.
“We are not so much lobbying as we have this idea of contemplating a change in the TFSA. They are allowed to be skewed toward big enterprises because ( those companies) have stock options and are exchanged on stock markets,” Youri Chassin, the research director at the Montreal Economic Institute, said in an interview.
The Canada Revenue Agency says the types of investments allowed in a TFSA are generally the same as an Registered Retirement Savings Plan and include cash, mutual funds, securities listed on a designated stock exchange, guaranteed investment certificates bonds and certain shares of small business corporations.
The chief executive of the Canadian Federation of Independent Business, Dan Kelly, said he finds the idea, which was floated by MEI in a news release Wednesday, to be intriguing.
“It’s ironic I can finance one of the big companies out there but not one of my good friends who I know has ( an idea) that will probably be a success. I’m willing to take the risk but not allowed to do that within the TFSA,” said Chassin.
There’s nothing to stop Canadians from investing in start-ups or small businesses but any earnings would be taxable which the MEI paper places at a disadvantage to investments in TFSA which are never taxable. The group says 84.3 per cent of the heads of start-up enterprises rely on personal financing, either their own or personal loans. Only 17.3 per cent receive financing from friends or relatives.
Small businesses with fewer than 100 employees account for 70 per cent of all jobs in the private sector, MEI points out.
One of the issues Canada Revenue Agency might have with these type of investments would be pricing which gets tricky because of a lack of liquidity. The MEI says the government could follow the same guidelines applied for family business transfers to produce a fair market value.
“There is potential for someone making a lot of money within his TFSA and this potential exists right now. The reason it exists is to foster a savings culture. The whole idea is to shelter your gains from taxation. It’s good because it encourages people to save,” says Chassin, adding the advantage just needs to be extended to small business.
Kelly, whose organization represents 109,000 small and medium- sized member businesses, says his organization has lobbied for entrepreneurs to use their own money in RRSPs — something technically allowed but very difficult.
“We’ve advocated at CFIB for years that their needs to be greater flexibility around RRSPs,” said Kelly. “They ( the MEI) are absolutely on to something. There is for efficiency of tax rules a lot of prohibitions that block pools of money from being available to small and medium- sized enterprises. The s pi ri t behind t hi s makes a lot of sense.”
He agrees there might be concern that somebody undervalues their investment to put it into a TFSA and avoid taxes but said those concerns could be addressed. “There are always ways to minimize potential risks to the treasury,” said Kelly.