Archived - Backgrounder: Labour-Sponsored Venture Capital Corporations Tax Credit

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Labour-Sponsored Venture Capital Corporations (LSVCCs) are a type of mutual fund corporation, sponsored by labour unions or other labour organizations, that make venture capital investments in small and medium-sized businesses. LSVCCs may be referred to by other names under provincial legislation.

A 15-per-cent federal tax credit is provided to individuals for the acquisition of shares of LSVCCs on investments of up to $5,000 each year, providing up to $750 in federal tax relief. Some provinces provide a similar tax credit, although Ontario recently eliminated its credit. In addition, LSVCC shares may be held within Registered Retirement Savings Plans and benefit from the tax assistance provided to investments in these plans.

Federally registered LSVCCs are subject to the rules set out in the Income Tax Act. Provincially registered LSVCCs are subject to the rules set out in the legislation of the province in which they are registered and are prescribed for purposes of the Income Tax Act. This prescription allows individuals investing in provincially registered LSVCCs to claim the federal tax credit.

The federal LSVCC tax credit was introduced in the 1980s, when access to venture capital for small and medium-sized businesses was limited. However, the economic environment and the structure of the venture capital market have changed significantly since that time.

The LSVCC tax credit has been criticized by academics, the Organisation for Economic Co-operation and Development as well as venture capital industry stakeholders as being an ineffective means of stimulating a healthy venture capital sector.

Economic Action Plan 2013 proposes to phase out the federal LSVCC tax credit. The federal LSVCC tax credit will remain at 15 per cent when it is claimed for a taxation year that ends before 2015 and will be reduced to 10 per cent for the 2015 taxation year and to 5 per cent for the 2016 taxation year. The federal LSVCC tax credit will be eliminated for the 2017 and subsequent taxation years.

Federal LSVCC Tax Credit Phase-Out
Taxation Year 2013 2014 2015 2016 After 2016
LSVCC tax credit rate 15% 15% 10% 5%

Note: An individual who acquires shares of an LSVCC in the first 60 days of a taxation year may claim the tax credit for the year of the acquisition or the prior year.

Economic Action Plan 2013 also proposes to end new federal LSVCC registrations, as well as the prescription of new provincially registered LSVCCs in the Income Tax Act. An LSVCC will not be federally registered if the application for registration is received on or after March 21, 2013, i.e., Budget Day 2013. A provincially registered LSVCC will not be prescribed for purposes of the federal LSVCC tax credit unless the application was submitted before March 21, 2013.

The Government is seeking stakeholder input on potential changes to rules related to investment requirements, wind-ups, redemptions and other rules governing the operation of LSVCCs.