FirstOntario 5-year claimed 6.00%* rate TFSA. | General financial discussion | Discussion forum

Speculative investment vs Savings? Where have we seen this movie before, i.e. as in PACE? Six percent seems too good to be true and without digging deeper may be based on corporate preferred shares in the marketplace. Even something as simple as CPD (current yield almost 6% in eligible dividends) or ZPR (current yield of about 6.3% in eligible dividends). It works until it does not.

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Venteicher (re Post #1) . . .

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Dean

I agree.

People should "shop around" and see what other preferred shares are available, especially publicly traded preferred shares covered by sites like PerfBlog. One of the criticisms of those PACE Financial preferred shares was that one could have got similar yielding preferred shares that were publicly traded and issued by well known companies that filed quarterly financial reports.

The targeted 6% dividends from the FirstOntario investment shares are not guaranteed to be in cash:

What is the dividend that will be paid on this new investment share series?
FirstOntario’s Board of Directors considers whether to declare a dividend, and at what rate, annually. Dividends may be paid in cash, shares, or in a combination of both. It has been the past practice of FirstOntario to pay dividends on its investment shares in the form of additional shares. …

Also, don't confuse the right to submit a redemption request with the right to have the shares redeemed. Asking for something is not the same as being entitled to the same thing:

… Once that five-year non-redeemability period ends, members can request redemption at any time. Redemption requests are considered twice each year, at the Board meetings in March and September. Redemptions are limited to 10% of the shares issued and outstanding at the end of the preceding fiscal year. …

That "10% of the shares issued and outstanding at the end of the preceding fiscal year" instead of "10% of the shares issued and outstanding originally" means it will be a long, long time before one's shares are redeemed if lots of people want their shares redeemed.

I don't buy them either. If I wanted or "needed" this kind of risk, I'd compare with other options first. I don't think the little bit of extra projected income matches the risk when you can get insured CU GICs for 5.3 - 5.5% through a deposit broker.

And they're definitely not "eligible dividends" under CRA. You will pay tax at same rate as interest or earned income.

Venteicher:

4)The Class B shares are not yet issued, so they would deposit money firstly in a TFSA at 4%, before it goes into shares, does that break the 'deposit withdrawn from a TFSA can't be reinvested until following year rule'?

Credit union shares can be held as tax-free registered assets. (Or, if you will, as a TFSA, though they're not a savings account.)

If the financial institutions offers both, they can transfer funds from a TFSA GIC into a share GIC without leaving registered status, and thus no delay or rule violation.

If they are doing a "jumpstart" type promotion where they put the money into a non-registered GIC before transferring it into the shares at year-end when the client has more TFSA room, the funds are only entering the share account once.
RetirEd

There is nothing "insidious" going on. CUs have been offering these shares for many years and I would expect that front line staff do know what they are - unlike the PACE situation which was a totally different and unfamiliar product.
According to OP, First Ontario says it has always paid the projected rate, and I would imagine that is more generally true as well. Class B investment shares are part and parcel of the offerings of many, if not all, CUs, at least here in Ontario. There is nothing that needs to be investigated but everyone needs to do their own due diligence and read up, as always.

However, I've certainly heard bank "advisors" lie about the products they were so desperate to sell in order to earn their keep their jobs.

AltaRed said
Not sure why 'banks' have been brought into this discussion, but I wouldn't buy black box financially engineered products, such as market linked GICs, with middlemen skimming the proceeds, from bank employees either. There are far more transparent and highly regulated investment offerings in the public marketplace.  

Market linked GICs are actually very simple to understand. Essentially the investor:
1) give up the dividend and the associated dividend tax credit for the underlying
2) pay away ~3% of their principal amount away which is the fee to issuer and advisor
3) have a return linked to the stock market, but has max cap etc
4) return is treated as a taxable interest income (not 100% sure)
5) downside protection and guarantee some form of minimum return

One can see clearly which bullet is a positive or negative from the investor's standpoint. 🙂