Venture -- Labour Sponsored Investment Funds
What is a Labour Sponsored Investment Fund? (Venture Funds)
Conceived in 1985, an LSIF (Labour Sponsored Investment Fund) is an investment fund that has a specific mandate to invest in small and medium-sized Canadian businesses. The federal, and select provincial governments, offer tax credits to LSIF investors.
Generally, LSIFs invest in eligible small and medium-sized Canadian businesses. The aim of these funds is to develop the Canadian economy by promoting the growth of small businesses and by creating jobs in emerging areas such as high-tech and life sciences, as well as in traditional industries such as manufacturing, industrial, and services sectors. The nature of the investments, as well as investment timing, is governed by legislation in order to protect investors and ensure that the governments' goals of economic development and job creation are being met.
What is a Research Oriented Investment Fund (ROIF)? (Ontario-only)
A ROIF (Research Oriented Investment Fund) is a specific type of Labour Sponsored Investment Fund that the Government of Ontario has introduced to support companies in the life sciences. To qualify as an ROIF, an LSIF must hold half of its assets in companies focused on research and development. In Ontario, an investment in a ROIF is eligible for tax credits of 35% (20% provincial and 15% federal) on the first $5,000 invested annually. The residents of all other provinces, excluding Manitoba (The Funds are not offered for sale in Manitoba), are eligible for a 15% federal credit.
The Government of Ontario has demonstrated its commitment to research and development through the provision of an additional tax credit to labour-sponsored venture capital investment funds that qualify as ROIFs. To qualify as a ROIF, a labour-sponsored fund must hold at least 50% of its investments in businesses that, generally, incur at least 50% of their expenses as research and experimental development.
The Advantages of Venture - LSIF Funds
1. Benefit from 30% Tax Credits
In addition to an RRSP deduction, investors in the venture capital asset class receive up to 30% - 35%, in tax credits on the first $5,000 invested each year. The Federal and Ontario governments each offer up to $750 in tax credits for a combined total of $1,500 in annual tax savings. Your tax savings can easily be re-invested to help you achieve even higher investment returns, or applied to fund personal goals such as paying down your mortgage or saving for a child's education. It's a win-win situation. In addition to accessing and supporting Canada's most promising companies, labour Sponsored Investment Funds enables you to achieve immediate tax savings.
Labour Sponsored Funds tax credits are subject to certain conditions and are generally subject to recapture, if shares are redeemed within eight years.
2. Access a Top-Performing Asset Class
Proven to out-perform most major asset classes over the long-term, venture capital has the capacity to earn you outstanding investment returns. Venture capitalists work closely and actively with the companies they invest in so that over time, they can be purchased or go public at significantly higher values than the original investment. A venture firm's track record, reputation and investment strategy have a large bearing on the future success of its investments.
3. Diversify for Strength
It is important for investors to achieve portfolio diversification in order to spread investment risk among asset classes, geographic exposure, investment styles and sectors. Retail venture capital funds are an outstanding opportunity to give your portfolio added diversification while tapping into a top-performing asset class. And since venture funds invest primarily in private companies, your portfolio is further insulated from public market volatility.
Labour sponsored investment funds are highly speculative in nature. An investment in these types of funds is only appropriate for investors able to make a long-term commitment and with the capacity to absorb the loss of some or all of their investment.