Today’s federal budget introduced the concept of a tax-free savings account of up to $5,000 per year. Canadian Capitalist described the tax-free savings account in his usual eloquence.  Being the entrepreneur that I am, I am going to look at the tax-free savings account in a different manner- how to profit from its creation (and all indications are that the budget will pass) and operation starting in 2009. You guessed it- the usual disclaimers apply- this is for informational purposes only and not advice. Given the tax-free savings account is literally less than 12 hours old, I am being very speculative in my thinking. Thus, please seek your own professional advice.

The government’s brochure (found in the link above) has the following buzz words- “savings” (mentioned 4 times in 8 headlines) and “tax-free.” Lots of tax-free savings that need to be protected eh?…  I can see the financial industry’s marketing material now: “What to protect your tax-free savings account? Buy a Principal Protected Note…” Principal Protected Products (PPN’s) are being flogged like hot cakes (I am dating myself- flogged like iPod’s?) given the market has become so unpredictable so what do you think is going to happen when we have tax-free savings account? We are going to be sold to death on making sure we protect our contribution with the requisite selling on fear. Cue more PPN’s, high interest savings accounts and other “secure” investment vehicles, like money market mutual funds, with built in fees.

It appears from preliminary review that the tax-free savings account will be administered by the same people who administer our RRSP- the banks and large financial institutions. Thus, the two sets of players to benefit the most from tax free savings accounts are:

1. Banks who have great retail operations and can capitalize on their existing clientele and attract new clients to open tax-free savings accounts; and
2. The big mutual fund companies and wealth management companies (who are basically one and same) who can create a myriad of PPN’s and more funds or will manage these accounts for seniors (who stand to benefit the most since there is no claw back against pension payments).

Who exactly are these players?

On the banking side, Royal Bank of Canada (RBC) and TD (known as the “Big 2″) are traditionally known as having the best retail banking operations- they are noted for being savvy marketers (at least for bankers) and attracting money from new sources. For example, when RBC launched its high interest bank account, it attracted $1.6 billion from outside its existing clients in the first 90 days of its launch.  TD, with its Canada Trust customer-friendly lineage, is well known for having great retail operations such as its long hours. Expect to see a lot of blue and green when the tax-free savings accounts are opened in 2009 (I own stock in both banks).

On the mutual fund side, the two largest mutual fund dealers by market share are IGM Financial Inc. and RBC (assuming you count Phillips, Hager & North’s market share which RBC is buying). IGM’s traditional lead is now approximately $2 billion over RBC which is not that great considering IGM is managing approximately $102 billion in assets (I own IGM indirectly through my holdings in PWF).

Assuming that these companies can capitalize on opening, managing or selling products to your and my tax-free savings account, they may not be bad stocks to own since sales will not occur until 2009 so there will not be an immediate impact on these companies’ bottom line. The good news is that these stocks are quite cheap relative to recent prices. The downside is that, for the banks, there may still be unknown subprime exposure. Thus, opportunity abounds with risk (or as the Chinese say, change equals opportunity). As usual, this is not a recommendation to buy or sell any stock- please do your own research.