Is the 40% tax credit available in some provinces enough to compensate for the higher risk of labour-sponsored funds?

Talbot Stevens, speaker and author of Financial Freedom Without Sacrifice, thinks so - at least for some.

"The fine print presents an almost irresistable opportunity for seniors," says Stevens. "If you are 63 or over, permanently retired or disabled, you only need to hold the investment two years to keep the tax credits. Most people have to hold the fund at least five years to keep the credits."

As illustrated in the table, the break-even point for a 2-year hold is a fund return of minus 23%. This means that with a 40% tax credit and a two year time period, the fund itself would have to lose 23% two years in a row for the investor to end up losing a penny.

For funds primarily invested in government guaranteed treasury bills, this isn't likely. If the fund itself earns nothing over two years (a 0% return), the 40% tax credit still produces an annual return of 29% — not that bad.

For those of us not yet 63, the break-even point for a 5-year hold is when the fund loses 10% a year for five years in a row. As shown, holding these funds longer than required dilutes the value of the tax credits, and reduces your total return.

“Despite being riskier, the break-even points for labour funds are very reassuring”, says Stevens. “With a 40% tax credit, they are very appeal­ing for a portion of your total invest­ments, especially if you are 63 or over. But as always, check with your advisor to fully under­stand concerns over liquidity, manage­ment track record, commissions, higher management fees, etc. Also, confirm the amount of the tax credits available in your province, and the minimum holding period.”

Labour-sponsored funds are relatively new and very popular, growing to almost $2 billion nationwide. To compensate for their riskier nature of investing in unproven companies, these funds qualify for tax credits on annual investments up to $5,000. 

Depending on the province, the tax credit can be as much as 40%, or a maximum of $2,000. This is on top of your RRSP refund, if you choose to put them inside your RRSP.

Talbot Stevens, financial speaker and author of Financial Freedom Without Sacrifice, is the president of a financial education firm providing employer-sponsored workshops, and has started a petition to make basic financial education a mandatory part of the school system.

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Talbot Stevens is a financial educator, industry consultant, and author of "Financial Freedom Without Sacrifice" and "Dispelling the Myths of Borrowing to Invest". For other story ideas, visit the Free Resources menu of www.TalbotStevens.com. For more information, contact Judy Culford, Communications Director for Talbot Stevens, by calling (519) 663-2252, or emailing judy@TalbotStevens.com.