What is a Labour-Sponsored Investment
Fund?
 A
Labour-Sponsored Investment Fund (LSIF) is a specialty fund designed
to provide funding to small and medium-sized Canadian companies.
Like conventional mutual funds, LSIFs collect capital from a large
number of investors and professional money managers manage these
pools of capital. Unlike conventional mutual funds, which invest
in publicly traded companies, LSIFs invest primarily in private
companies and are therefore considered venture capital. The federal
and some provincial governments offer tax credits of 30% or 35%
of the investment, depending on the fund, to LSIF investors.
Why does the government give
you a tax credit for investing in an LSIF?
LSIFs
were designed to encourage Canadians to invest in young, growing
companies that have the potential to become significant economic
contributors. Venture Capital investing can be risky, however, and
governments give tax credits to offset the risk and make it attractive
to invest in these early-stage companies.
TAX SAVINGS*
Breakdown of the Tax Savings based on a 30% tax credit: $5,000 investment
in a LSIF can cost as little as $1,180.
| LSIF
Tax Credit |
30% |
$1,500 |
| RSP
Tax Savings |
46% |
$2,320 |
| Out
of pocket |
24% |
$1,180 |
| Total
Tax Savings |
$3,820 |
What is the maximum investment
you can make in an LSIF?
To
make use of the tax credits, the maximum amount an individual can
invest in any one year is $5,000. But because of the tax credits,
a $5,000 investment in a LSIF can cost as little as $1,180.
Any amount in excess of $5,000 can be
carried forward one year, provided the investment is made within
the first 60 days of the year. Any amount in excess of an additional
$5,000 cannot be carried forward.
When is a good time to buy
an LSIF?
Anytime.
However, it is most beneficial to invest as part of your RRSP contribution
because, in addition to your federal/provincial tax credit, you
get the added advantage of RRSP tax?savings. Some investors contribute
to their plans on an ongoing basis, through pre?authorized monthly
contributions.
Do
you have to use new money to buy an LSIF?
No,
money already in your RRSP can be used to buy an LSIF and you will
still receive the tax credits. However, if it is a new contribution,
you then receive your RRSP contribution deduction in addition to
the tax credits.
What
are the benefits of investing in LSIFs?
You
receive a 30% or 35% tax credit, along with regular RRSP tax savings;
- Return potential of venture capital - historically
the top performing asset class
- They offer average Canadians a way to participate
in venture?capital investing;
- They invest in firms that create new jobs,
thereby fueling the Canadian economy;
- They increase the foreign content limit
in your RRSP up to 50%.
Why do LSIFs have an eight-year
holding period?
LSIFs
typically invest in early-stage small- and medium-sized private
companies. These types of companies typically take four to seven
years from the time of the investment to realize their full value
and deliver meaningful shareholder returns. A growing company needs
financial stability in order to build its business.
What
happens if I redeem some or all of my investment before the eight-year
holding period is over?
FIf
you redeem prior to the end of the eight?year holding period, the
tax credits you received upon purchase have to be paid back in their
entirety. In addition, if you bought the fund with a deferred sales
charge (DSC), you have to pay a penalty when you redeem. The DSC
begins at 6% and declines 0.75% each year, reaching 0% after eight
years. If you hold past the anniversary date, you are able to redeem
without any fee or penalty.
What
is venture capital investing?
Venture
capital has been a top-performing asset class over the past 50 years.
It involves investment in small- and medium-sized, primarily private
companies. It is not about selecting stocks; it is taking an ownership
stake in a company and being a partner in helping that company grow.
How
does an LSIF make money for the investor?
By
investing in companies that are early in their development ? rather
than in large, mature businesses - you have the opportunity to realize
the huge growth potential of a maturing company. Typically, large
gains are made when a private company goes public, or when it is
purchased by a larger company.
How
do the portfolio managers decide what to invest in?
The
managers of a fund review complete business plans and financial
information for all companies that are investment candidates. From
this information they determine if the company fits the investment
objective of the fund. If so, then an intensive research process
and comprehensive evaluation of the company, management, market,
products and competitors begins before the investment is made.
How do the tax credits work?
The
tax credits are a credit against your taxes payable. You use them
when doing your income taxes and they simply reduce the amount of
federal and provincial taxes payable by the amount of the tax credits.
Every province does not grant every LSIF tax credits however, so
you should check the status of the fund you are considering.
| Foreign Content increase:
|
| RRSP portfolio amount: |
$100,000 |
|
| Regular foreign content limit: |
$30,000 |
or 30% |
 |
| LSIF purchase: |
$5,000 |
|
| Eligible foreign content excess: |
$15,000 |
or 15% |
|
| New foreign content limit: |
$45,000 |
or 45% |
When do you receive the tax
credit receipts?
You
will receive the tax credit receipts within a month of purchase
of your fund units.
How does the foreign-content
limit increase work?
Holding
an LSIF in an RRSP enables investors to increase their foreign content
limit to a maximum of 500 of their portfolio. For every $1 invested
in an LSIF in an RRSP, Unitholders may increase their foreign content
limit by $3. This $3 for $1 increase occurs up to the 50% limit.
How
can you purchase shares of Labour-Sponsor Investment Funds?
These
funds must be purchased through your financial advisor.
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