Browse Analysis of Managed and Structured Products

22.3.1 Advantages Of Labour-sponsored Funds

Explore the advantages of Labour-sponsored Venture Capital Corporations (LSVCCs), including the significant tax credits available for Canadian investors and how these investments can enhance savings within registered accounts.

Overview

Labour-sponsored Venture Capital Corporations (LSVCCs) offer attractive incentives for investors, primarily through federal and provincial tax credits. These funds are designed to encourage investment in small and medium-sized enterprises by providing various tax benefits to investors.

Tax Credits

Federal Tax Credit

Investors in LSVCCs are eligible for a 15% federal tax credit on annual investments, subject to a maximum amount.

Provincial Tax Credits

Additional provincial tax credits are available in several provinces, ranging from 15% to 17.5%. For example:

  • Québec: 15% provincial tax credit
  • Saskatchewan: 17.5% provincial tax credit

Depending on the province, the combined tax credit can range from 15% to 32.5%.

Did You Know?

The federal LSVCC tax credit was set to phase out by 2017, but the 2016 federal budget reinstated it, maintaining the 15% credit.

Examples

Here’s how these tax credits can work for an investor:

1### Example: Pierre in Quebec
2
3Pierre invests $5,000 in an LSVCC in Quebec. Because the fund qualifies for both federal and provincial tax credits:
4
5- Federal tax credit (15% of $5,000): $750
6- Provincial tax credit (15% of $5,000): $750
7
8Total tax credit received: **$1,500**

Though there is no limit to how much one can invest in an LSVCC, the federal tax credit is restricted to a maximum of $5,000 per year, and some provinces impose lifetime limits.

Pro Tip: The unused portion of federal tax credits cannot be carried forward or back for subsequent or prior taxation years.

Registered Accounts

RRSP and RRIF

LSVCC shares are generally eligible for Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs). Investors who purchase LSVCC shares within an RRSP benefit from additional tax savings:

1### Example: Pierre's RRSP Investment
2
3Pierre invests $5,000 in an LSVCC for his RRSP in Quebec. With a 50% marginal tax rate, he realizes tax savings as follows:
4
5- RRSP tax savings (50% of $5,000): $2,500
6- LSVCC tax credits: $1,500
7
8Effective after-tax cost of investment: **$1,000**

Transfer to RRSP or RRIF

Shares can be either bought directly by an RRSP trust or transferred to an RRSP or RRIF. In case of direct purchase, a deduction equal to the purchase price is allowed. If transferred, the deduction equals the fair market value at the time.

Both transactions must comply with the contribution limits of an RRSP.

Other Registered Accounts

LSVCC shares are also eligible investments for other registered accounts such as Tax-Free Savings Accounts (TFSAs).

Key Takeaways

  1. Significant Tax Benefits: Investors benefit from both federal and provincial tax credits.
  2. RRSP and RRIF Eligibility: Investments in LSVCCs within registered accounts maximize tax savings.
  3. Maximum Federal Credit: Limited to $5,000 investment annually.
  4. Provincial Variations: Tax credits vary by province, ranging up to 32.5% combined.
  5. Registered Accounts: LSVCC shares can be held in TFSAs apart from RRSPs/RRIFs, providing versatile tax planning options.

Frequently Asked Questions

What is the maximum federal tax credit available for LSVCCs?

The maximum federal tax credit is available on investments up to $5,000 per year.

Can I carry forward unused federal tax credits?

No, unused federal tax credits cannot be carried forward or applied to previous tax years.

Are LSVCCs a good fit for every investor?

LSVCCs may be suitable for those looking for specific tax advantages and willing to invest in small to medium-sized enterprises. Consulting with a financial advisory can help determine suitability.

Glossary

  • Labour-sponsored Venture Capital Corporations (LSVCCs): Investment funds that provide venture capital to small and medium-sized enterprises and offer tax credits to individual investors.
  • Registered Retirement Savings Plans (RRSPs): A retirement savings plan that is registered with the Canadian federal government, offering tax benefits.
  • Registered Retirement Income Funds (RRIFs): A retirement fund that provides regular income and is typically used to withdraw funds from a matured RRSP.
End of Chapter 22 – Understanding other managed products and labor-sponsored funds can significantly augment investment strategies.


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## CSC® Exams Practice Questions





📚✨ CSC Exam Questions ✨📚

Welcome to the Knowledge Checkpoint! You'll find 10 carefully curated CSC exam practice questions designed to reinforce the key concepts covered. These questions will help you gauge your grasp of the material, identify areas that need further review, and ensure you're on the right track towards mastering the content for the Canadian Securities certification exams. Take your time, think critically, and use these quizzes as a tool to enhance your learning journey. 📘✨

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markdown ## Which of the following is a main attraction of Labour-Sponsored Venture Capital Corporations (LSVCCs)? - [ ] High liquidity - [ ] Short-term investment gains - [x] Federal and provincial tax credits - [ ] Guaranteed returns > **Explanation:** The main attractions of LSVCCs are the federal tax credits that investors receive and the provincial tax credits that some provinces offer. ## What is the percentage of the federal tax credit on LSVCCs? - [ ] 20% - [x] 15% - [ ] 10% - [ ] 25% > **Explanation:** LSVCCs include a 15% federal tax credit on an annual investment up to a maximum amount. ## In Saskatchewan, what is the total possible tax credit percentage for an LSVCC investment? - [ ] 30% - [x] 32.5% - [ ] 25% - [ ] 27.5% > **Explanation:** In Saskatchewan, there is a 15% federal tax credit and a 17.5% provincial tax credit, totaling 32.5%. ## As of the 2016 federal budget, what is the current status of the federal LSVCC tax credit? - [ ] Phasing out - [x] Reinstated and set at 15% - [ ] Reduced to 10% - [ ] Increased to 20% > **Explanation:** The 2016 federal budget reinstated the federal tax credit, and it currently remains at 15%. ## If Pierre invests $5,000 in an LSVCC in Quebec, what is the total combined tax credit he receives? - [ ] $1,250 - [ ] $1,000 - [x] $1,500 - [ ] $750 > **Explanation:** Pierre receives a $750 federal tax credit (15% × $5,000) and a $750 provincial tax credit (15% × $5,000), for a combined tax credit of $1,500. ## What is the annual maximum limit on the amount eligible for federal LSVCC tax credits? - [ ] $10,000 - [ ] $7,500 - [ ] $2,500 - [x] $5,000 > **Explanation:** The federal tax credit is available on a maximum of $5,000 invested in any one year. ## Can the unused portion of federal LSVCC tax credits be carried forward or back? - [ ] Carried back only - [ ] Carried forward only - [x] No, it cannot - [ ] Both carried forward and back > **Explanation:** The unused portion of the federal tax credits is not refundable and cannot be carried forward or back. ## In what types of accounts are most LSVCC shares eligible investments? - [x] RRSPs and RRIFs - [ ] Non-registered accounts - [ ] Corporate accounts - [ ] All types of accounts > **Explanation:** Most LSVCC shares are eligible for RRSPs and RRIFs. ## What additional benefit does an investor receive when buying LSVCC shares within an RRSP? - [x] RRSP tax deduction - [ ] Guaranteed return - [ ] Higher tax credit percentage - [ ] Exemption from federal taxes > **Explanation:** When LSVCC shares are purchased within an RRSP, the contributor to the RRSP receives the RRSP tax deduction, as well as any available LSVCC tax credits. ## What is the effective after-tax cost of Pierre's $5,000 investment in an LSVCC for his RRSP, assuming a 50% marginal tax rate? - [x] $1,000 - [ ] $2,500 - [ ] $2,000 - [ ] $1,500 > **Explanation:** Pierre realizes tax savings of $2,500 (50% of $5,000) plus $1,500 in LSVCC tax credits, making the effective after-tax cost of his investment $1,000 ($5,000 - [$2,500 + $1,500]).

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Sunday, July 21, 2024