Exempt Experts prides itself on helping our clients develop unique offerings that are tax deferred plan eligible. There are many options available to make an investment eligible, each with their own advantages and disadvantages. As part of our service, we will help you decide on the right structure for your offering, as well as provide guidance on how to structure an offering to both attract potential investors and avoid the pitfalls of improper corporate financing.
What is a tax deferred plan?
Tax deferred plans are investment accounts where earnings are not subject to tax. The most common tax deferred plans are RRSPs, RRIFs and TFSAs; however, there are also other tax deferred plans with specific purposes such as saving for education (RESP) and saving the future needs of a disabled individual (RDSP).
Why does deferred plan eligibility matter?
According to Statistics Canada, Canadians hold more than 63%, $593 billion of their investable assets inside tax deferred plans. This large pool of capital can only be accessed if a Company’s offering meets the Federal Income Tax Act rules for deferred plan eligibility. In our current economic state, many individuals do not have excess cash available to invest and therefore able to offer deferred plan eligibility.
What are the options for deferred plan eligibility?
The Federal Income Tax Act lists a barrage of investments that are eligible for deferred plans; however, not all of the options work for all companies. In our experience, the following structures are the most popular and cost effective methods of obtaining deferred plan eligibility.
1. Public Corporation (PubCo)
A public corporation is a corporation that has met the necessary requirements and filed the necessary elections with CRA to become “public”. There are a number of requirements to become a PubCo including having 150+ shareholders, who each own stock with a minimum fair market value of $500 at the time of the election with CRA. While PubCos are “public” from an Income Tax Act perspective, they are not listed for trading on a stock exchange, nor are they SEDAR filers. Both the debt and equity of these corporations are eligible for deferred plans.
2. Publicly Traded Company Subsidiary
Debt investments offered by subsidiaries of companies that are traded on a listed stock exchange, such as the TSX or TSX Venture Exchanges, are eligible for deferred plans. Through our affiliation with certain publicly traded companies, we are able to facilitate creation of new companies controlled by one of these companies.
3. Mutual Fund Trust (MFT)
Mutual Fund Trusts are entities that have that have met the Income Tax Act requirements and filed the paperwork with the CRA to become a MFT. Similar to PubCos, MFTs require 150+ investors whom each own units having a fair market value of $500; however, unlike PubCos, this is an ongoing requirement and not just a ‘point in time’ test. The unique and primary benefit of having a MFT as opposed to a PubCo is the “flow-through” nature of trusts; this allows profits to be returned directly to the investors prior to there being any corporate level of taxation.
4. Specified Small Business Corporation (SSBC)
SSBCs provide an easy method of deferred plan eligibility to companies that use “all or substantially all” of their assets in an active business carried on in Canada. This means that 90%+ of the company’s assets must being earning active business income, as opposed to passive income such as investment income. Only the equity of these corporations is eligible for deferred plans. SSBCs are an important part of the exempt market, providing an easy access to capital for many small and medium sized businesses across Canada.
5. Specialized Options
In addition to the above, there are also specialized structures available that cater to specific industries. Such options include Mortgage Investments Corporations (MICs) and syndicated debt instruments (including syndicated mortgages).