Every so often, credit unions give their adult members the opportunity to invest in the success and financial well-being of their chosen financial institution. This is done by allowing members to purchase investment shares in the credit union itself.
Investment shares aren’t the same as the membership shares that credit unions require new members to purchase when joining. They’re an investment opportunity exclusively for members aged 18 or above.
In exchange for a moderate level of risk, investment shares may offer a better rate of return than comparable term deposits. This is paid out through an annual dividend, either in cash, additional shares, or a combination of the two. There’s usually a minimum dividend target, but it is a target that may not reflect the dividends paid in any particular year.
It’s important to note that dividends aren’t guaranteed in any year and depend upon the profitability of the credit union. It is rare for a credit union’s Board of Directors not to declare a dividend, but it may be legally unable to pay dividends at all in certain circumstances.
When selling a new series of investment shares to its members, a credit union typically sets a minimum and maximum number of shares available, perhaps a minimum of two million and a maximum of five million, and also institutes minimum and maximum purchase amounts for investors. Shares are sold for a fixed length of time or until they’re all gone. The proceeds of the sale are added to the Credit Union’s regulatory capital thereby supporting the Credit Union’s pursuing of growth opportunities and its long-term stability.
In some cases, credit unions allow current term deposit holders to convert their money into investment shares without penalty, even if the term is not complete.
Purchasing investment shares is a longer-term investing strategy because, like a term deposit, your investment is tied up for a fixed period. In this case at least five years. Once the minimum investment period has passed, investors can choose to hold their shares and keep receiving dividends, or redeem their shares for the original investment amount. Investment shareholders are not eligible as investment shareholders to receive any residual value of the credit union’s broader assets beyond the return of the original investment amount (although, since all of these holders of investment shares are also members, they continue to have their rights as members).
Only 10% of the investment shares issued and outstanding at the start of the Credit Union’s fiscal year are permitted to redeem their shares in that fiscal year, so some investors may have to wait longer than five years for redemption. Either way, investment shares aren’t a good option for clients who expect they’ll need to access their money before the term is up.
Investment shares are what are known as Class A shares. Unlike money kept in a savings account, Class A investment shares are not covered by provincial deposit insurance.
The income earned from investment shares is taxable. However, investment shares can be held within a Tax-Free Savings Account (TFSA), or a Registered Retirement Savings Plan (RRSP), allowing investors to mitigate or eliminate their tax exposure. The Credit Union will not permit investment shares to be held within Registered Retirement Income Funds (RRIFs).