By Rob Cosman, Partner, Jones & Cosman Chartered Professional Accountants
The Canada Revenue Agency offers incentives to taxpayers who invest in Labour-Sponsored Venture Capital Corporations. First introduced in 1988, these credits were almost eliminated in 2013, but ultimately, the government decided to keep the credits intact. However, tax year 2016 ushers in some changes.
What Are LSVCC shares?
Labour-Sponsored Venture Capital Corporations are designed by labour unions in Canada to provide venture capital to up-and-coming enterprises. These corporations give individual investors a unique opportunity to support small- and medium-sized enterprises in Canada.
Which LSVCC Shares Qualify for the Tax Credit?
As of 2016, the purchase of shares from both provincially and federally registered LSVCCs qualifies for this tax credit. However, for 2017 and future tax years, shares from federally registered LSVCCs do not qualify. Additionally, you must be the first registered holder of the shares, and for tax year 2016, the amount of your credit varies depending on whether you have shares in a provincially or federally registered LSVCC.
How Much Is the Tax Credit?
As of tax year 2016, the tax credit for shares from federally registered LSVCCs is 5% of the share price. For example, if you spend $1,000 on shares, your federal tax credit is $50.
In contrast, shares from provincially registered LSVCCs receive a 15% tax credit in tax year 2016 and future years. In this case, a $1,000 investment qualifies for a $150 tax credit. However, you may only claim the credit on an investment up to $5,000. As a result, your maximum federal credit may be up to $650. You may also qualify for provincial or territorial investment credits as well as the federal credit.
What Changes Occurred to the Labour-Sponsored Funds Tax Credit?
In 2015, taxpayers could only claim a 10% tax credit for these investments, but the CRA offered the same credit for shares purchased from funds registered provincially and federally. Unfortunately, taxpayers were only allowed to claim the credit on provincially registered funds if their province or territory also offered a tax credit.
For instance, in tax year 2015, Prince Edward Island did not offer a provincial tax credit for the purchase of shares from LSVCCs. However, the government of Quebec did offer a provincial credit for these investments. As a result, investors in Prince Edward Island could not claim a federal tax credit for purchasing shares in provincially registered LSVCCs. However, investors in Quebec could claim the federal credit.
As of 2016, these rules have been changed, and when filing tax returns for 2016 or subsequent years, investors may claim the federal credit, irrespective of whether their province or territory offers a credit.
How Do You Claim the Tax Credit?
To determine your credit, calculate the net cost of the shares you purchased in LSVCCs. This is the cost of the shares minus any government assistance you used to buy them. Note the difference on line 413 of Schedule 1 of your federal income tax return. Then, calculate your tax credit and note it on line 414. As of tax year 2015, you may only include the cost of up to $5,000 of shares on your return, making your maximum tax credit $500, or 10%.
This is a nonrefundable tax credit. It works along with your other nonrefundable credits such as the investment tax credit to reduce the amount of income tax you owe. However, these credits cannot trigger a refund. As a result, if you earn a $500 credit for labour-sponsored funds but only owe $300 in tax, your tax bill is eliminated, but unfortunately, you don’t receive a refund.
When Must You Purchase the LSVCC Shares?
When completing your tax return, you can take into account shares purchased during the calendar year of the tax year for which you are filing. However, you may also include shares purchased during the first two months of the current year. For example, when completing your 2016 tax return, you may include shares purchased in 2016 as well as shares purchased in January or February 2017. If you already reported shares purchased in January or February 2016 on your 2015 return, you cannot claim those credits again on your 2016 return.
What Are the Tax Obligations for LSVCCs?
If you run an LSVCC, you can only sell Class A shares to individuals, terminating corporations, and trusts governed by registered retirement savings plans or tax-free savings accounts. At the end of each year, you must fill out T5006 slips and send them to all of the individuals and trusts that have bought your shares throughout the year. You also must complete a T5006 information return and submit it to the CRA. Investors use the information on this slip to complete these tax returns.
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