Archived - Backgrounder: Labour-Sponsored Venture Capital Corporations Transition Rules
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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. 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.
Economic Action Plan 2013 announced the phase-out of the federal LSVCC tax credit by 2017. The 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 tax years.
Economic Action Plan 2013 also announced an end to new federal LSVCC registrations, as well as to the prescription of new provincially registered LSVCCs in the Income Tax Act.
In order to assist with the orderly phase-out of the federal LSVCC tax credit, the Government held consultations with stakeholders on potential changes to the tax rules governing LSVCCs. Specifically, the Government sought public input on potential changes to rules related to investment requirements, wind-ups, redemptions and other rules governing the operation of LSVCCs. The consultations were launched on May 23, 2013 and closed on July 23, 2013.
Based on the feedback received, the Government is proposing transition rules to facilitate the exit of federally registered LSVCCs from the LSVCC tax credit program.
Rules for Exiting the LSVCC Tax Credit Program (“Exit Rules”)
In order to avail itself of these rules, an LSVCC will be required to give notice to the Canada Revenue Agency of its intent to cease operating as a federally registered LSVCC and exit the federal LSVCC tax credit program (“notice”). The notice would be required to include a reasonable date for when the LSVCC would surrender its registration. The maximum time for the fund to surrender its registration would be three years from the date notice is given. If an LSVCC does not meet this condition, then the relief described below would not apply.
Once an LSVCC has given notice of its intent to exit the program:
- The LSVCC would no longer be eligible to issue shares eligible for federal tax credits;
- Investment pacing requirements would no longer apply to the LSVCC; and,
- The LSVCC would not be subject to the penalty for discontinuing its venture capital business.
These rules would only be available to LSVCCs that have raised less than 20 per cent of their outstanding Class A shares, excluding shares that have been outstanding for at least 8 years, in the 24 months prior to the date notice is given.
The exit rules do not remove the existing penalty applicable to shareholders who redeem shares held for fewer than 8 years before the discontinuance of the LSVCC’s venture capital business.
The proposals provide flexibility to federally registered LSVCCs seeking to exit the program. LSVCCs that do not give notice and remain in the program will continue to be subject to the existing rules in the Income Tax Act governing LSVCCs.
It is proposed that these exit rules come into force on the date of this announcement.
Issuance of New Classes of Shares
The Income Tax Act currently permits LSVCCs to issue additional classes of shares where the rights, privileges, restrictions and conditions attached to the shares are approved by the Minister of Finance. As part of the transition, the Minister of Finance will, subject to review, allow federally registered LSVCCs to issue new classes of shares that would not be subject to the pacing rules but would not attract the federal LSVCC tax credit. This would provide federally registered LSVCCs that wish to continue in the program with the option to raise funds that can be invested without restrictions. Proposals for the issuance of new classes of shares would need to be approved by the Minister of Finance prior to the issuance of the shares.
Federally registered LSVCCs that have given notice of their intent to exit the program will not be subject to the penalties applicable for issuing new classes of shares without approval.