How does a 78.7 per cent RRSP refund sound?
Little known Quebec labour fund gives big tax breaks, but performance is lukewarm

When Bob Deslauriers decided to put some of his retirement money in a Fonds de Solidarité FTQ, RRSP eight years ago, he got a huge 70 per cent tax rebate. But it was not friends or financial advisors that recommended the investment.

"Many people don't even know that the Fonds de Solidarité exists, especially in the Anglophone community," said Deslauriers. "I only found out about it through advertising."

Fund investors benefit from 15 per cent tax credits from both the federal and provincial governments in addition to their regular RRSP deduction, meaning tax rebates can reach up to 78.7 per cent for those in upper income brackets.

The fund is what is known in Canada as a labour-sponsored venture capital fund. Managing its investor's retirement savings is only half of its mandate. The fund's raison d'être is to use its financial clout to create or preserve local jobs by investing at least 60 per cent of contributions in Quebec businesses.

As a result of this dual mandate, returns have been lukewarm, averaging 6 per cent during the past decade. But for Deslauriers, the low return is not a problem. "You have to look at the total package," said the retired John Abbott College administrator. "When you add the tax credits it's a pretty good deal."

The fund has been a huge success among Quebecers. As of June 30th, 2001, 489,000 investors had $4.6 billion of retirement savings tied up in fund assets, making it larger than all other Canadian labour-sponsored venture capital funds combined.

But almost all of the investors are francophones. According to fund officials, only two per cent of requests for information are made in English, a total that likely corresponds to the proportion of its Anglophone investors.

According to Deslauriers, Anglophone reluctance to invest in the fund stems from the fact it is union backed, and that its sponsor the Quebec Federation of Labour -- a big supporter of Quebec independence -- is perceived to be in bed with the Parti Québécois.

But that's only part of the story. You won't find many financial advisors recommending the Fonds de Solidarité FTQ. The fund does not pay commissions or trailer fees to investment professionals, and relies instead on its own network of union volunteers to distribute the product.

But the fact that they don't get paid to promote the Fonds de Solidarité is only one reason financial professionals won't give it their thumbs up. Many will cite the low historical returns and contribution withdrawal restrictions.

Unlike a regular RRSP, Fonds de Solidarité FTQ investors must wait until they retire to cash in their contributions, which usually means at age 65. There are some special provisions for those who retire early, who face extended periods of disability or unemployment, as well as a few others. But these are meant to be exceptions.

According Denis Leclerc, the Fonds de Solidarité FTQ's vice-president (shareholder services), fund investments should only be made by those with a long time horizon.

"We manage retirement money," said Leclerc. "Some see it as a disadvantage, that they can't withdraw their money anytime they want. But you'd be amazed at how many people have thanked me over the years, because if they had been allowed, they would have spent the funds on a trip south or whatever."

Leclerc also challenges critics of the fund's long-term performance. "You know many people who invested in those high tech companies, would be happy to have a six per cent return," said Leclerc. "Our return is comparable to the Canada pension plan."

Indeed for older investors like Deslauriers, the fund can be a real bonanza. That's because those close to retirement can amortize their tax credits they get much faster than younger investors.

To use rough calculations; an investor aged 55, who kept his contribution in the fund for ten years, and retired at 65, the 30 per cent tax credit, would boost his 6 per cent average return on investment, by three percentage points a year. So his real return would have been 9 percent.

But for someone aged 35, who kept his contribution in the fund for 30 years, his 30 per cent tax credit would only boost his average return by one percentage point per year, and his total return would average out to only 7 per cent per year.

So although none of Deslaurier's friends recommended the investment to him, he is talking up its benefits to anyone who will listen.


Photo caption: Investor Bob Deslauriers, shown here with Denis Leclerc, Fonds de Solidarité FTQ vice-president (shareholder services), says that when the value of tax credits are added, the fund's returns are pretty good.


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