In Canada, we have the benefit of investing into Registered Retirement Savings Plan (RRSP) or Tax Free Savings Accounts (TFSA). And did you know you can use this money in ways to impact your community directly?This blog outlines how you can use RRSP or TFSA to invest in early stage companies, as well as why entrepreneurs offer this opportunity to investors. This is especially timely as the 2017 RRSP deadline approaches on February 28, 2018.
What is a RRSP?
A Registered Retirement Savings Plan (RRSP) is a personal savings account with special tax benefits. Did you know you can reduce your taxes by investing through your RRSP? The contributions you put into your RRSP account are deductible on your income tax return, and therefore can be used to reduce tax.
Income and gains earned on your investments through RRSP accounts are not taxed until withdrawn. The incentive here is to withdraw during retirement, when you will typically be in a lower-tax bracket. Your RRSP contribution limit for 2017 is 18% of the earned income you reported on your tax return in the previous year, up to a maximum of $26,010.
Benefits of a Registered Retirement Savings Plan (RRSP)
- Tax deferral on any gains or income earned on the investment, until withdrawal
- Defer taxation until retirement, when the investor will likely be at a lower tax bracket
- Tax-deductible contributions
What is a TFSA?
TFSA stands for “Tax-Free Savings Account”, which is an account that provides tax benefits for saving in Canada. Any investment income, including capital gains and dividends, earned within a TFSA are not taxed, even when the funds are withdrawn. There are limits on how much you can contribute each year (for example, in 2017 the limit was $5,500).
Benefits of a Tax-Free Savings Account (TFSA)
- Tax-free returns for future gains or income earned on investments
- Any return on investment will not be taxed, even when withdrawn
The Benefits of using TFSA and RRSP to Invest in Early Stage Private Companies
"Allowing investors to invest using their TFSA or RRSP opens up a whole new pool of brand champions to rally behind your company. Not everyone wants to invest from their personal accounts and enabling them to think of other possibilities to invest is beneficial for the company and the investor."
- Thealzel Lee, Co-Manager of VANTECH & Investor
"I'm glad we decided to go through the process of becoming an Eligible Business Corporation (EBC) and unlocking potential investors to commit to supporting our company through their RRSP or TFSA. When raising capital, it was essential to understand all opportunities to allow investors to invest and in a way that makes the most sense for them. By going through this process, we've opened up our company to a whole new set of investors."
- David Miller, CEO of CertiStay, Inc.
How Does it Work?
In order to receive funds from investors who want to invest in your business through an RRSP or TFSA, your company must be registered through a trust company such as Western Pacific Trust Company (WPTC) . This allows a streamlined process for entrepreneurs to enable the option of RRSP and TFSA investments. At FrontFundr, we manage RRSP and TFSA approval through Western Pacific Trust, where an investor’s accounts are held in trust - we also facilitate the account opening process for investors.
These investment tools allow investors to choose to either defer capital gains or potentially earn tax-free return on investments.
- According to Stats Canada in 2014, contributions to registered retirement savings plans (RRSPs) totaled $38.6 billion. Nationally, the median contribution in 2014 was $3,000 per person
- In 2016, 26% of the campaigns on FrontFundr used RRSP/TFSA as an option for investors
- Not all online investment platforms offer this as an option. As an Exempt Market Dealer, FrontFundr can work with you to offer this as an option to investors.
To learn more about different ways investors can support your next raise, check out FrontFundr’s Investor Page
If you have any specific questions regarding your company’s raise, we’re always happy to connect.
*Not all securities are eligible for investment in a registered retirement savings plan (RRSP). You should consult your own professional advisers to obtain advice on the RRSP eligibility of these securities.