Can You Invest in a SAFE Through an RRSP or TFSA?April 11, 2017
We have been fielding numerous questions lately about whether or not a SAFE can be a qualified investment for an RRSP or a TFSA.
A SAFE (“simple agreement for future equity”) is a relatively new investment vehicle for parties wishing to invest in start-up companies. Generally, a SAFE would typically have the following features (or some variation of the following features), but the terms are generally tailored to meet the requirements of the parties:
- A fixed amount is invested (the “Purchase Amount”) in return for the future grant of equity;
- Equity will be granted to the SAFE holder on the earlier of a round of preferred stock financing (either at or without a discount to the round) or an exit (either at or without a discount to the value per common share paid in the exit)
- The holder may receive cash in lieu of their equity award in the event of an exit, and will receive cash payment of up to the Purchase Amount should the company dissolve or wind up before the occurrence of either a financing round or an exit.
- On dissolution, the repayment of the Purchase Amount to SAFE holders notionally ranks behind all debt of the company but ahead of any payment to equity holders.
The short answer is that we don’t know for certain whether a SAFE is or is not a qualified investment for RRSPs and TFSAs because we can’t know for certain how the tax authorities will view a SAFE.
Although a SAFE looks a lot like a warrant, which is typically a qualified investment for RRSPs or TFSAs, we can’t find any mention of SAFEs or SAFE-like instruments in any discussion by the CRA. As a result, it is unclear whether the CRA would take a similar view. In particular, the CRA may take the view that a SAFE is more akin to a debt instrument in a private company, which is not a qualified investment for TFSAs or RRSPs.
Because it is not clear how the CRA would view a SAFE, it would be difficult to provide a legal opinion to an institution confirming that a SAFE is a qualified investment, which institutions typically require in order to allow RRSPs or TFSAs to invest in a SAFE. Whether the CRA will issue any guidance on this in the future remains to be seen. We will be sure to provide an update if they do.
Investing in private company shares (directly, or by way of a SAFE), may not be advisable in any event. We have previously blogged on why investing in private company shares in a registered account (such as an RRSP or TFSA) may not be the most efficient tax plan. In addition to the concerns outlined in the previous post, the company will now have an institutional shareholder that it has to chase for approvals for future transactions requiring shareholder approval, which may impede the company’s ability to act quickly on financing opportunities.