Ontario’s long goodbye to the LSIF tax credit

(September 30, 2005) The government of Ontario has issued details on how it plans to eliminate the provincial tax credit for labour sponsored investment funds (LSIFs), phasing them out over the next five years.

“We’ve consulted the industry, and heard its views,” said Finance Minister Greg Sorbara. “We’re committed to an orderly wind-down of this tax credit, and believe that this schedule will help accomplish that goal.”

The 15% credit will remain in place through the 2008 taxation year, so there is essentially no change through the 2009 RSP sales season. For fiscal 2009, the credit will drop to 10% for the 2010 sales season, dropping to 5% for taxable 2010. After the 2011 RSP season, the credit will be eliminated altogether. The 5% incremental tax credit offered for Research Oriented Investment Funds would be phased out on the same timetable.

“We were naturally disappointed in the government’s decision four weeks ago to eventually phase out the tax credits,” says David Ferguson, managing general partner at Vengrowth. “Having said that, we do believe the lengthy transition period will minimize the disruption to the long term supply of venture capital. I think its being implemented in a prudent fashion.”

The move comes at a time when the province is working to harmonize requirements to help funds move to the federal government’s Labour Sponsored Venture Capital Corporation program. At this time, Ottawa has shown no sign that it plans to cut its 15% tax credit. The provincial finance ministry says it will consult further with the industry on transition rules governing pacing, eligibility and other reporting requirements.

“We’ve always looked at the tax credits as the cherry on top of a very attractive asset class,” Ferguson says. “We recognize that over the last couple of year, given where we’ve been in the venture capital cycle, it’s been an important aspect to sales.”

He points out institutional investors do not qualify for the same tax credits as retail investors, and says that side of the business has remained strong.

“Without question there will continue to be a market for labour sponsored funds,” he says.

Filed by Steven Lamb, Advisor.ca, steven.lamb@advisor.rogers.com