Montreal, February 9, 2017 – TFSA rules forget about small businesses, shows an MEI Viewpoint published today suggesting that the category of qualified investments be expanded. Large corporations are already well-served by various investment vehicles; it is now time to think of small companies as well. Tax-Free Savings Accounts (TFSAs) are the perfect tool for this.
“TFSAs provide a flexible savings option, but that flexibility does not extend to the kinds of investments that are permitted,” explains Youri Chassin, Economist and Research Director at the MEI and author of the publication. “These investments are the same ones as for RRSPs: basically, mutual funds, shares listed on a stock exchange, bonds, and guaranteed investment certificates. The law therefore prevents investing in start-ups and companies in development.”
Small businesses, rarely listed on stock exchanges, are thus at a disadvantage. An investor cannot finance the business of a friend or loved one through a TFSA, which means that any earnings would be taxable, making such investments less appealing.
Yet small businesses have difficulty obtaining funds from financial institutions, and they pay higher interest rates on the loans they do get. As a result, 84.3% of the heads of start-up enterprises rely on personal financing, namely their own funds or personal loans, but relatively few of them (17.3%) receive financing from friends or relatives.
Modifying the rules that govern TFSAs by allowing Canadians to invest in small businesses instead of restricting them to large ones would not only expand their savings options, but also improve the access that small businesses have to private funding. This solution would stimulate the start-up and growth of businesses financed by the savings of loved ones, of a community, or of small investors.
The publication points out that small businesses (fewer than 100 employees) account for a significant share of economic activity in Canada. Despite their small size, they are so numerous that they represent 70% of all jobs in the private sector.
“Instead of creating an nth tax credit or subsidy program to help small businesses develop, it would be simpler and less expensive for the government to open up TFSAs to investments in small businesses not listed on a stock exchange,” adds Michel Kelly-Gagnon, President and CEO of the MEI. “This would involve Canadians in the development of a culture of entrepreneurial investing and wealth creation, all while allowing them to directly support entrepreneurs who really need it.”
The Viewpoint entitled “Should Small Business Investments Be Permitted in a TFSA?” was prepared by Youri Chassin, Research Director at the MEI. This publication is available on our website.
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The Montreal Economic Institute is an independent, non-partisan, not-for-profit research and educational organization. Through its studies and its conferences, the MEI stimulates debate on public policies in Quebec and across Canada by proposing wealth-creating reforms based on market mechanisms.
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Interview requests: Pascale Déry, Senior Advisor, Communications, Current Affairs, MEI / Tel.: 514-273-0969 ext. 2233 / Cell.: 514-502-6757 / Email: email@example.com