Many Saskatchewan investors may not know what a Labour-Sponsored Investment Fund (LSIF) is. The provincial and federal governments introduced them in the 80’s as a way to promote economic growth as these funds invest in small to medium sized Canadian companies, or as in the case as SaskWorks, Saskatchewan companies. These are higher risk investments as most are private small companies, with many in the early stages of their development.
In SK, investors can invest up to $5000 per year into a Labour-Sponsored Investment Fund and receive a 32.5% tax credit, or $1625. This total tax credit is comprised of a federal credit of 15% and a provincial credit of 17.5%. These funds can be purchased through an RRSP, LIRA or non-registered account. If purchased through your RRSP you would receive your regular RRSP tax deduction on top of your tax credit, which magnifies your tax savings significantly. You must hold the investment for 8 years or else you will have to pay back the tax credits if sold prematurely. If you are a long term investor and the math makes sense to you, then a 32.5% tax credit should sound pretty good.
“...but my other equity investments have averaged much higher than SaskWorks.”
Although this may be true, it is an apples to oranges comparison, as a labour-sponsored fund is a different beast than a regular equity mutual fund or an ETF. With that being said it is no slouch, as SaskWorks Diversified has averaged +6.61% annually over the past 5 years and +4.76% over 10 years, and has NEVER had a negative rate of return in any calendar year. (http://quote.morningstar.ca/quicktakes/Fund/f_ca.aspx?t=0P000072QF®ion=CAN&culture=en-CA)
Also, in case you were wondering, the fund was operating during the stock market crash in ’08, and yes, it still had a positive rate of return for that year. Last year in 2018 we saw the TSX composite down -11.64%, and SaskWorks stayed positive yet again at +4.89%. A stable track record and very low volatility since inception of this fund and I’d say that would be a pretty good compliment to most anyone’s portfolio.
Still not convinced? Did I mention the 32.5% tax credit that would get you $1625 guaranteed on your $5000 investment on top of any investment earnings? This GUARANTEED amount of the tax credit broken down over the 8 year period the investment would have to be held would work out to +4.06% average annually. Pair that with the investment return over 10 years at +4.76% and you're sitting at a total of +8.82% annual average return on this investment over the last 10 years. Yes, it is possible to get those kind of long term returns with other equity investments available, but nothing else would have +4.06% of that return guaranteed in the form of a fully liquid tax credit.
Be financially savvy with your tax credit and use it to reinvest in your RRSP, TFSA or RESP to take advantage of more tax breaks and government grants, or use it to pay down any debt you may have.
“...8 years is a long time to hold an investment, and what happens to my SaskWorks shares after the 8 years?”
8 years may sound like a long time, but anyone more than 8 years away from retirement shouldn’t really worry about that kind of time-frame, especially if invested within their RRSP. If you think you might need this money and have no other emergency funds or liquid assets then it likely isn't the right product for you. After the 8 year period you have options to cash out your investment, transfer it to another RRSP, or rollover your existing shares. When rolling over your existing shares back into SaskWorks after the 8 years you then receive the 32.5% tax credit again on the original investment without having to come up with any “new money.” This works out to be 65% of tax credits received in a 9 year period. An excellent way to take advantage of rolling over these shares for these tax credits would be to use a SaskWorks Laddering strategy.
“...ummm, what is the SaskWorks Laddering strategy?”
The laddering strategy would have the investor make these $5000 SaskWorks investment purchases every year for 8 years. This can be done with lump sum deposits or on a weekly, biweekly or monthly contribution schedule. This would end up costing the individual $40,000 over the 8 years, and then every year after the 8th year the investments continuously get rolled over which will get you $1625 of tax credits each year going forward without having to contribute any new money to SaskWorks. This should be even more appealing to a young investor in their 20’s or 30’s. A 25 year old that implemented this laddering approach until the age of 65 would earn him/herself potentially $1625/year of tax credits for the 1st 8 years they contributed, as well as every year after if they rolled over their matured shares. After this person turns 33 they never have to contribute to SaskWorks again, but by rolling over their initial investments they would receive the $1625 tax credit every year for the next 32 years. This would add up to be $65,000 of just tax credits alone received over your lifetime with only contributing $40,000 over the 1st 8 years based on this example.
“...I would love to take advantage, but I don’t have $5000 to invest.”
There are ways to make this more easily accessible, such as setting up an automatic withdrawal program where a smaller amount gets deposited into the investment every pay period. Weekly payments would work out to $96.15 every week, biweekly payments would work out to $192.30 every 2 weeks, and monthly payments would work out to $416.66 every month. You also have the option of transferring any existing RRSP investments of your own directly into SaskWorks to avoid having to come up with any new money. Also, it is important to remember that a $5000 investment today will only have a net cost of $1000-$2000 depending on your marginal tax rate. This is after you have received your tax savings when filing your annual tax return.
"...I'm not sure if I should invest some money for myself, my spouse, or maybe invest in an education fund for my children instead. Plus, interest rates and housing prices have me worried and I was wondering about paying down some of my mortgage."
Why not do all 4? When there's a will, there's a way, right? Well, more importantly, when there's a good financial planner working with you...then there is a way. Using the benefits of the huge tax savings with a SaskWorks investment we can utilize them efficiently and invest for retirement for both spouses, put money into your child's RESP, and pay off principal on the mortgage to address all of the concerns. Here's how you can turn a $5000 SaskWorks investment into an $11,469 increase to your net worth and keep the whole family happy.
“...it sounds pretty good, but why has my advisor or bank not offered this investment to me?”
-LSIF’s have a bad stigma as poor investments attached to them across Canada that other advisors may attach to SaskWorks as well without actually learning all the facts. -They may not be comfortable offering LSIF’s to their clients as they are considered to be higher risk and speculative options based on the fact they invest in small and medium sized non-public companies.
-Advisors may be scared off by their high management fees in comparison to a mutual fund or an ETF. As stated before these cannot be compared to either as these investments take much more time for the portfolio managers to assess the companies as many of them are not publicly traded which makes it more difficult to attain information on them as well as to purchase them. There are more fees and expenses necessary when analyzing the quality of a private investment. In case you skimmed over the blog earlier the rates of returns have been +6.61% over the last 5 years and +4.76% over 10 years, all without experiencing a negative rate of return any year during this time...and yes, those are the returns realized after fees!
-Your advisor or bank may not have the ability to sell this investment to you. Your advisor may not have the proper education or licensing to offer this product, and the investment regulators in Canada have banned a lot of the big banks from selling this product as well as many non-independent investment firms, leaving only the properly licensed independent advisor to offer such a product. Unfortunately, the banks/advisors may not advise the purchase of such investment if they are unable to carry these investments for their clients themselves.
"...are there any other LSIF's available to invest in besides SaskWorks Diversified fund?"
Yes, there is! For Saskatchewan residents there are currently two fund companies offering LSIF's that qualify for the tax credits. SaskWorks has a Diversified fund as well as a Resources:
http://quote.morningstar.ca/quicktakes/Fund/f_ca.aspx?t=0P000072QF®ion=CAN&culture=en-CA (Diversified)
http://quote.morningstar.ca/quicktakes/Fund/f_ca.aspx?t=0P000080A1®ion=CAN&culture=en-CA (Resource)
The other fund company is Golden Opportunities that also offers a Diversified fund, Innovation fund, and a Resource fund:
http://quote.morningstar.ca/quicktakes/Fund/f_ca.aspx?t=0P000071RS®ion=CAN&culture=en-CA (Diversified)
http://quote.morningstar.ca/quicktakes/Fund/f_ca.aspx?t=0P0000J2CD®ion=CAN&culture=en-CA (Innovation)
http://quote.morningstar.ca/quicktakes/Fund/f_ca.aspx?t=0P0000XYVQ®ion=CAN&culture=en-CA (Resource)
The reason we primarily promote SaskWorks Diversified over the Resource options is that it has exposure to many different sectors in SK lowering the risk of a potential sector-specific recession. It has an excellent long term track record of out performing its Diversified competition, and has never experienced a negative rate of return in a calendar year since the fund was created in 2001. Although SaskWorks Diversified is classified as a high risk investment, it has achieved steady rates of returns with relatively low volatility. Obviously, past returns do not guarantee returns going forward, regardless of the long term results. I am always willing to discuss every option available in detail with clients to find what will specifically fit their investment needs.
To sum up, SaskWorks Diversified should be an option that many Saskatchewan investors should consider when deciding on how to allocate their investment portfolios. These investments help stimulate our own local economy by investing in these companies, it has proven low volatility over 17 years, it has an excellent track record of positive returns, and of course the guaranteed return of money in the form of a tax credit are all great reasons to consider working this fund into your overall financial plan.
Any questions on SaskWorks or anything else, just reach out! Happy Saving!
-Marty Metz, CFP®
CERTIFIED FINANCIAL PLANNER
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