Invest more aggressively in TFSAs

Holding private stock in tax-free savings accounts (TFSAs), with their annual allowable contribution of $5,500 (as of 2016) and the ability to withdraw your money at any time, can potentially yield you huge gains.

To shelter a private placement investment inside a TFSA, the stock has to be shares of a specified small business corporation: generally a Canadian company that uses virtually all of its assets carrying on an active business in this country.

But this strategy is off the table for any company of which you own 10% or more, or do business with on a non-arm’s-length basis.

If you’re related to anyone with 10% or more interest in the company, through a blood relationship, marriage, common-law partnership or adoption, you’re non-arms-length and it’s a no-go. You’re also disqualified if you have close business ties or appear to have closely aligned interests.

This non-arm’s length requirement carries through for the entire time you own the investments.

The investment will also become prohibited if the assets of the corporation start to be invested to earn significant passive income (instead of being used to earn active business in the corporation).

You’ll want to keep with Canadian businesses and avoid holding U.S. and other foreign securities in a TFSA so that you aren’t hit with an unrecoverable foreign withholding tax.

To shelter the private placement inside a TFSA, you’ll likely be required to obtain a signed form that attests to the investment’s TFSA-qualified status. The TFSA administrator is responsible for reporting any non-qualified investments acquired within the TFSA to CRA.

Administrators require TFSA holders to obtain an independent opinion as to whether the small business shares qualify and to confirm the value of the shares when they are transferred to the TFSA.

You’ll need to contact your TFSA administrator for any necessary forms.