Annual Review of Labour Sponsored Investment Funds

January 2011

LSIFs in the news
VenGrowth fight heads to court - from Advisor.ca
(including quotes from the Spiess McGlade Team's own LSIF expert, Andrew McGoey)

January 2010

March 1st, 2010 represents the last opportunity for Ontarians to participate fully in the 30% tax-credits offered by LSIFs and apply those credits against 2009 income. After March 1st, the Ontario tax-credit will be reduced to 10% (5% in 2011, 0% there-after). Note this article refers to Ontario changes, other provinces' credits vary widely - contact us for details if you are in another province.

In last year's review, we highlighted several funds which had been frozen from redemptions or new purchases. Little has changed for those funds, though Growthworks did purchase the Canadian Medical Discoveries Fund last year, and Vengrowth I & II just paid its first cash distribution to unit-holders - though investors are still unable to sell from either fund.

The LSIF industry consolidation is a trend we have been tracking and reporting on for several years (see Managed Money Reporter, January 2006).

Industry insiders have been busy lobbying the Ontario Government to reverse the elimination of the tax credits decision with no success to date. The lack of support from the Ontario government to sponsor the venture capital sector in Canada is directly leading to the virtual extinction of this sector. LSIF funds will continue to face serious head-winds as raising new cash for acquisitions will become increasingly difficult as the tax-credit incentives dry up.

We are finding relatively little interest in the tax breaks of LSIFs, considering the hit and miss success of the sector in general. A quick review of the performance numbers, shows that there have however been a handful of winners, but many losers in the sector.

Of the LSIF funds that are still available for purchase, we feel that Venturelink Funds represent the purest opportunity to participate in the Venture Capital space in Ontario. Their portfolios contain only one publicly traded company, Dragonwave (TSX:DWI) which was added prior to their 2007 IPO as a venture name and has been a success story. Venturelink Funds have also been among the leaders among LSIF funds in raising new cash for the portfolio over the past several years. The Dynamic Venture Opportunities fund, and the Growthworks Balanced funds are a few others that have been able to keep their heads about them while many others have lost theirs.

For more information on these funds or other questions about your account, please contact our LSIF specialist Andrew McGoey by email or at 416.945.4107.

January 2009

Over the past several months, several LSIF providers have announced that they have halted redemptions. Canadian Medical Discoveries Fund (CMD) was first to announce in June 2008 and was followed in December by Vengrowth Investment Fund I & II, and B.E.S.T Discoveries Fund. At this time, no date has been set if and when redemptions will be re-instated. Vengrowth plans to pay an annual distribution to unit holders during this time.

Unit-holders nearing the end of their eight-year holding period have found out that they will be unable to sell (or rollover) their investments, understandably frustrating news.

What has Happened?

In the wake of the Provincial government's decision to wind-down the LSIF program by 2011 many funds have been crippled by poor sales and have been forced to fund redemptions from the portfolios, mostly consisting of private equity names that do not offer very good liquidity.

With a recent trend of increasing redemptions and while operating in an illiquid asset class amidst the dramatic adverse market conditions over the past year, managers have been forced to halt redemptions while opportunities are sought to exit portfolio holdings in a manner that is most beneficial for unit-holders.

As we reported last year, we felt that the potential for further consolidation in this asset class was very likely and now see further evidence of this in the potential purchase of CMD by Growthworks.

LSIFs have been one of the few investments offering retail investors tax-benefits from the Federal and Provincial tax credits available. While industry experts have lobbied with the Ontario government to reverse their decision on the tax-credit phase-out, no significant progress has been made over the past few years on this — though the government did increase the allowable purchases to $7,500 from $5,000 (for the Federal Tax Credits).

Taxation
Year
RRSP Sales
Season
LSIF Tax Credit
(federal)
LSIF Tax Credit
(Ontario)
2008 2009 15% 15%
2009 2010 15% 15%
2010 2011 15% 10%
2011 2012 15% 5%
2012 2013 15% 0%

This RRSP season represents the final opportunity to qualify for the 15% Provincial tax credit (for the 2008 tax year) that will be reduced to 10% in 2009. (See table, right)

If you have any questions on your LSIFS, please contact our LSIF specialist Andrew McGoey.

More on labour fund redemption suspension announcements

More on labour sponsored funds

Important LSIF Facts

Many specialty LSIFs qualify as a Research Oriented Investment Fund to be eligible for an additional 5% Ontario tax credit for a total of 35% in tax credits at the federal and provincial level.

After your 5 or 8 year holding period for your fund has expired, you can redeem and repurchase your fund, and get the tax credits all over again. See the rules for more details.  We regularly mail to clients who have shares eligible for redemption to let them know about their rollover options.  You may want to review your accounts to see if you will have holding period(s) ending in the near future and plan accordingly.  Please contact us - we would be glad to review your funds with you.

The LSIF purchase does not have to be made with new money. Existing assets in your RRSP or non-registered account can be used to purchase a Labour fund.

Not all provinces offer tax savings for LSIF investment.  This information is intended for Ontario residents.

Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. The indicated rate(s) of return is (are) the historical annual compounded total return(s) including changes in (share or unit) value and reinvestment of all (dividends or distributions) and does (do) not take into account sales, redemption, distribution or optional charges or income taxes payable by any security holder that would have reduced returns. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated.  See more disclaimers ...

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F.  416.863.7479
E. carl.spiess@scotiamcleod.com
    allan.mcglade@scotiamcleod.com

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