Stock Savings Plan

What Is a Stock Savings Plan?

In a stock savings plan, certain Canadian provinces provide tax credits to residents who purchase initial public offerings (IPOs) of local companies. Stock savings plans are designed to encourage middle and high-income earners to invest in provincial economies to promote the growth of local businesses. There are also stock savings plans in other countries, but they are slightly different. For example, the term "stock savings plan" describes a type of dollar-cost averaging (DCA) investment program used in Hong Kong.

Understanding Stock Savings Plans

While similar plans exist in several countries, the best-known stock savings plans are in Canadian provinces, such as Alberta, Ontario, and Quebec. Canadian provinces have their own unique stock savings plans. The Quebec Stock Savings Plan (QSSP) was launched in 1979, and it is the plan for the Canadian province of Quebec. This particular plan provides tax benefits to Quebec residents who buy new issues of stock from local Quebec companies. In March 2012, stocks of Nemaska Lithium, an exploration and development company in Quebec's James Bay Region, were listed as "valid shares" and qualified for the province's stock savings plan. Another major Canadian stock savings plan is the Alberta Stock Savings Plan (ASSP)—a program that went live, effective February 1, 1986.

Generally speaking, stock savings plan participants may allocate up to 10% of their earnings to purchasing qualified stocks. Interested investors should first contact qualified broker-dealers to make sure they are eligible to contribute to the program. If so, the dealer would arrange a plan in the investor's name and secure eligible shares on the investor's behalf. That broker-dealer would be responsible for maintaining the account, recording all transactions, and providing investors with annual statements. The statements report items such as acquisition costs, the maximum potential tax credit for eligible shares purchased, and the disposition cost of all shares withdrawn from a plan during the year.

Stock savings plan participants may only invest in “eligible shares” of corporations, which must acquire certificates of eligibility. A corporation may obtain such documentation by applying to its corresponding Provincial Treasurer. The company must also satisfy specific criteria. If a certificate is granted, it will classify the corporation as either an “emerging,” “mature,” or “expanding” company, depending on its current assets and revenue profile.

Benefits of Stock Savings Plans

The tax advantages of a stock savings plan for investors are apparent, but there are other benefits as well. Canada is one of the most stable and prosperous countries in the world. So, Canadians can avoid the political risks of investing in less stable countries by making local investments in stock savings plans. The companies covered by stock savings plans are local, tend to be small, and are often new. That combination means investors have more influence over the companies.

Stock savings plans also provide benefits for provincial governments. Although they lose tax revenue by giving tax breaks to stock savings plans, they also get more money because of increased investment in the economy. More investment means more capital, which raises labor productivity. In a market economy, labor earns its marginal product, so higher productivity leads to increased wages. Higher wages also directly increase income tax revenues for provincial governments. More income can also reduce the demand for welfare programs and lower government expenses.

Criticism of Stock Savings Plans

By far, the most important disadvantage of a stock savings plan for investors is the lack of diversification. For example, Alberta's economy is heavily reliant on the oil industry. It follows that the local investments required to take advantage of Alberta's stock savings plan also depend on oil prices. The collapse of oil prices in early 2020 profoundly impacted oil investments, far more so than the stock market as a whole.

Furthermore, the fact that stock savings plan investments are concentrated in the local economy creates additional risks. If the local economy does poorly, investors might lose their jobs and have to sell their local investments when market prices are low to pay for expenses. Such situations make it difficult to pursue a buy and hold strategy with a stock savings plan.