Concept #5 – “Double Dipping” on Tax Credits
Investors are eligible to receive a 32.5% tax credit on the original purchase of eligible SaskWorks Venture Fund shares in Saskatchewan (this is in addition to any RRSP tax savings they may be eligible for). These shares must be held for a minimum 8-year period.
At the end of eight years, the investor has the option of rolling over (redeem and repurchase) the shares. The rollover is treated as a new purchase and is eligible for a further 32.5% tax credit on the old money. (The rollover results in a new 8-year minimum hold period for the applicable shares.)
Therefore, an investor who chooses to roll over his/her SaskWorks Venture Fund investment will have received 70% in tax credits over a 9-year period. These tax credits are like receiving a tax-free return of 70% on the original investment. At Saskatchewan’s top marginal tax rate (45%) this would be equivalent to earning 127% of regular taxable income (e.g. interest) on the investment [70/(1-.45)].
PORTFOLIO LADDERING STRATEGY
Advisors can now generate an ongoing stream of tax credits (and commissions) by creating a “laddered portfolio” of SaskWorks Venture Fund purchases over 8 years and then rolling over the shares as they meet the hold period requirements. The maximum tax credit in a year is $1,625 (32.5% of a $5,000 purchase). Therefore, the SaskWorks Venture Fund holding required to generate maximum ongoing tax credits is $40,000 ($5,000 per year for 8 years).
Advisors should consider an 8-year program whereby 8 investments of $5,000 are made. Once this ladder structure is set up, continuous rollovers can then occur, generating $1,625 in tax credits per year with no additional investment required.
This laddering strategy can be doubled up by including the client’s spouse.
Investment in an LSIF is subject to certain restrictions on resale and redemption. An investment in an LSIF is speculative and may not be suitable for all investors. Income tax savings are only one aspect of an investment in an LSIF. The merits of the investment as a whole should be considered. LSIF shares are offered by prospectus only. Consult the applicable LSIF prospectus for full details of the offering.
Rewritten with permission, based on a series of original articles written by Allan Jacks, Vice-President, Sales, Crocus Investment Fund. Previously published in CAIFA Winnipeg IMPACT Magazine.