The Labour-Sponsored Venture Capital Tax Credit

The Labour-Sponsored Venture Capital Corporation tax credit has long been used to encourage Canadians to invest in specific funds, created by labour unions to invest in small- and medium-sized businesses.

What is the Labour-Sponsored Venture Capital Corporation Tax Credit?

The LSVCC is a credit of 15 percent of the amount invested in specific types of funds sponsored by labour unions. The unions then reinvest the pooled money of all of their investors into small- and medium-sized businesses, and the profits are redistributed to the investors.

Some provincial governments give an additional credit if the labour-sponsored fund is in that province.

If the investment is made by a Registered Retirement Savings Plan, the beneficiary of the plan can claim the credit directly. Contributing money to an RRSP and then having the RRSP make such an investment can result in a double tax benefit.

The maximum amount that can be invested by a taxpayer is $5,000 per year. Unused credits can be carried over to future years.

Phasing Out Procedure

In their 2013 budget, the Canadian Government announced that it would eliminate the LSVCC, and begin phasing it out over a period of three years. Under this plan, the credit will be 10 percent for the 2015 tax year, 5 percent for the 2016 tax year, and 0 percent afterwards. Investing in labour-sponsored venture capital corporations will still be permitted, but there will be no special tax treatment for those who do.

There are several rules in play during the transition period. For instance, under the law, if you acquire shares of an LSVCC during the first 60 days of the tax year, you may claim the tax credit for either the year of the acquisition or the previous year. Therefore, if you acquire shares in the first 60 days of 2016, you will be able to claim them at a rate of 10 percent on your 2015 tax return. However, credits carried over to the 2016 tax year will be at the lower rate of 5 percent.

Transitional Rules

There are also transitional rules in play for those who have withdrawn money from their investment in a labour-sponsored fund to use as a part of a Home Buyer’s Plan or a Lifelong Learning Plan, and need to repay the funds over a period of time. Generally, if you fail to acquire new shares of an admissible fund in due course, a penalty is applied.

Under the phase-out rules, the penalty will be calculated using the rate applicable for the tax credit when the shares were acquired. If the rate was reduced at that time, then the reduced rate will be used to calculate the penalty.