1. What is a Labour-Sponsored Investment Fund ("LSIF")?
2. What is a Research-Oriented Investment Fund ("ROIF")? (Ontario only)
3. What are the criteria for investing in companies and selecting investments for LSIFs?
4. What is the difference between an LSIF and a regular mutual fund?
5. What is an investee company?
6. What is a follow-on investment?
7. What is a "MER"?
8. Why should I consider an LSIF for my portfolio?
9. How do I invest in CMDF?
10. What is the purchase deadline for an LSIF?
11. Are LSIFs RRSP eligible?
12. Can I use existing cash within my RRSP to purchase an LSIF?
13. Is a tax credit different or distinct from a tax deduction?
14. How much do I receive in tax credits when investing in an LSIF?
15. How do tax credits work with a spousal rrsp?
16. How do I claim my tax credits when investing in an LSIF?
17. How long do I need to hold my LSIF shares?
18. Can I hold LSIF shares within a RRIF?
19. What is the role of the labour sponsor in an LSIF?
20. What is the role of the fund's administrator?
1. WHAT IS A LABOUR-SPONSORED INVESTMENT FUND ("LSIF")?
An LSIF is an investment fund structured similar to a mutual fund that has a specific mandate to invest in small and medium sized Canadian businesses. Both the federal and some provincial governments offer tax credits to investors of an LSIF. One of the goals of these funds is to develop the Canadian economy by promoting the growth of small and medium sized businesses and to create jobs in both emerging industries such as high-tech and life sciences, as well as in traditional industries such as the manufacturing, industrial, and services sectors. The nature of the investments as well as investment timing is governed by legislation in order to protect investors.
2. WHAT IS A RESEARCH-ORIENTED INVESTMENT FUND ("ROIF")? (Ontario only)
The Government of Ontario has demonstrated its commitment to research and development through the provision of an additional tax credit to labour-sponsored investment funds (LSIFs) that qualify as ROIFs. To qualify as a ROIF, an LSIF must hold at least 50% of its investments in businesses that, generally, incur at least 50% of their expenses as research and experimental development. Ontario resident purchasers of Class A Shares of the Fund will qualify for an additional five per cent non-refundable provincial tax credit, giving these purchasers a total tax credit of 35% (20% provincial and 15% federal) to a maximum of $1,500 per year based on an annual investment of $5,000.
3. WHAT ARE THE CRITERIA FOR INVESTING IN COMPANIES AND SELECTING INVESTMENTS FOR LSIFS?
The criteria for selecting particular investments are guided by the specific investment objectives and profile of the fund, and therefore vary by LSIF. However there are certain investment criteria that apply to all LSIFs:
- Firms with a maximum of 500 employees, of which 50% or more must be employed in Canada
- Total firm assets cannot exceed $50 million
- The companies themselves must be located Canada
4. WHAT IS THE DIFFERENCE BETWEEN AN LSIF AND A REGULAR MUTUAL FUND?
An LSIF is, in fact, a type of mutual fund because it allows professional money managers to make investment decisions on behalf of its pool of investors. However, LSIFs differ from conventional mutual funds because LSIFs typically invest in private companies, which are predominantly hand-picked small and medium sized firms. LSIFs are managed by highly specialized private equity portfolio managers with the mandate, time and expertise required to manage each individual portfolio company, whereas conventional mutual funds typically draw their investments from the common universe of public companies.
By offering private equity funding, LSIFs offers their investors the potential to enjoy a higher potential rate of return as the companies they’ve invested in mature and realize value through mergers and acquisition, initial public offerings, and/or capital appreciation. Typically, large gains are made when a private company goes public (IPO) or when it is purchased by a larger company. Individuals investing in LSIFs indirectly share in both the profits and/or losses from these investments through fluctuation in the share price of the LSIF fund. LSIFs enable investors to reduce their overall investment risk by investing in a number of different companies.
There are also a number of differences in the rules that govern LSIFs and conventional mutual funds. For example, some of the rules directed at ensuring liquidity, diversification of investments, and other investment restrictions and practices that are normally applicable to conventional mutual funds do not apply to LSIFs in order to permit LSIFs to satisfy their investment objectives.
Additionally, LSIFs also typically offer their investors tax credits, whereas conventional mutual funds do not. However, in order to keep those tax credits, LSIF investors are required to hold their LSIF investment for eight years. If an LSIF investor redeems before this period, the tax credits are required to be repaid.
5. WHAT IS AN INVESTEE COMPANY?
An investee is a company that has secured an equity or debt-like security from one or more private equity investors.
6. WHAT IS A FOLLOW-ON INVESTMENT?
Typically, when LSIFs make an investment through an initial round of funding, it is anticipated that there will be subsequent or “follow-on” rounds of funding. As an investee company continues to grow, it will likely require additional funds - whether in the form of venture capital, an Initial Public Offering (IPO) or licensing or strategic partnership - in order to successfully develop their products and/or services towards successful commercialization, revenue generation and profitability.
WHAT IS A "MER"?
A MER is the management expense ratio which is the total of all expenses charged to a fund, plus the management fee, expressed as a percentage of the fund's total assets.
8. WHY SHOULD I CONSIDER AN LSIF FOR MY PORTFOLIO?
As an asset class, private equity has historically enjoyed the one of the highest rates of return over time. Despite the risks inherent in investing in private companies, holding an alternative asset class, such as private equity, in a portfolio has been shown to reduce overall portfolio risk. Risks are mitigated because asset values are tied to different variables than those present in the public markets. Additionally, LSIFs offer investors an opportunity to take advantage of generous tax credits. Please contact your financial advisor before investing.
9. HOW DO I INVEST IN CMDF?
Our Fund can be purchased through registered securities dealers, including financial advisors, planners, and brokers as well as discount brokerages. An independent financial advisor provides valuable information to help investors understand the investment strategy that is best suited for them. We strongly encourage investors to seek professional advice when considering whether to purchase shares of CMDF or any LSIF.
Before investing in any LSIF, please read the applicable prospectus. A prospectus has important information about the management, strategies, risks, and objectives of a fund.
10. WHAT IS THE PURCHASE DEADLINE FOR AN LSIF?
The purchase deadline for the 2007 taxation for LSIFs and ROIFs follow the same purchase deadlines as RRSPs for tax eligibility.
11. ARE LSIFS RRSP ELIGIBLE?
Yes, LSIFs are 100% RRSP eligible. In addition to a tax credit, LSIF investors receive an RRSP tax deduction if their investment is made through an RRSP.
12. CAN I USE EXISTING CASH WITHIN MY RRSP TO PURCHASE AN LSIF?
Yes, investors can use cash proceeds from their RRSP to purchase LSIF shares. This will trigger a tax credit outside of your RRSP. Please consult your financial advisor to determine the option that is best suited for your personal financial situation and goals.
13. IS A TAX CREDIT DIFFERENT OR DISTINCT FROM A TAX DEDUCTION?
Yes. A tax credit is the amount deducted directly from income tax otherwise payable, whereas a tax deduction is the amount deducted from total income to arrive at taxable income. The federal government and select provinces provide non-refundable tax credits to investors in LSIFs.
14. HOW MUCH DO I RECEIVE IN TAX CREDITS WHEN INVESTING IN AN LSIF?
The federal government provides a 15% federal tax credit to investors in LSIFS in all provinces and territories. Select provinces also provide non-refundable tax credits of up to 15% to investors in LSIFs. Ontario investors also have the opportunity to benefit from additional tax savings associated with the Ontario-based research oriented investment fund ("ROIF") program, for a combined federal and provincial tax credit of up to 35%. Investors wishing to maximize their investment could invest any tax savings arising from their tax credits and any tax savings received from making their LSIF investment through an RRSP.
15. HOW DO TAX CREDITS WORK WITH A SPOUSAL RRSP?
When LSIFs are purchased within a spousal RRSP, either spouse is entitled to claim the LSIF tax credit. There is the potential for a $20,000 purchase of LSIF shares per couple within the 60-day period following the calendar year – $5,000 per year for each spouse (assuming no LSIF shares were purchased for the prior year). Please consult your financial advisor for more details.
16. HOW DO I CLAIM MY TAX CREDITS WHEN INVESTING IN AN LSIF?
Investors must claim their tax credits when they file their annual tax return, and are required to submit the tax credit certificate or letter issued by the Fund's administrator, Felcom Data Services Inc., together with their return.
17. HOW LONG DO I NEED TO HOLD MY LSIF SHARES?
An investment in an LSIF is a long-term investment. Under current legislation, an investment in a LSIF must be held for a minimum of eight years. This is consistent with the principles of venture capital investing as it takes time for these types of investments to mature. If an investor redeems their LSIF investment before this period, they are required to repay the tax credits.
18. CAN I HOLD LSIF SHARES WITHIN A RRIF?
LSIF shares can be held in a RRIF but the Income Tax Act does not allow a RRIF to purchase LSIF shares directly. LSIF shares must either be purchased by an RRSP and transferred to the RRIF, or purchased in an open account and “swapped" into the RRIF for assets or cash of an equal value. As such, "rollovers" of LSIF shares are also not permitted in a RRIF. To "rollover" LSIF shares in a RRIF they would need to be "swapped" out of the RRIF and then "rolled over".
Due to the eight-year hold period, liquidity should be considered as investors approach the time to collapse an RRSP. LSIF shares cannot be annuitized, so if the RRSP is transferred to a RRIF, the RRIF must hold sufficient liquid assets to make the minimum required RRIF payments until the LSIF shares in the RRIF mature. Without sufficient liquid assets in the RRIF, LSIF shares may be withdrawn in lieu of cash to make the required minimum RRIF payments. However, LSIF shares cannot be redeemed until the remaining hold period has expired, and the value of the withdrawn LSIF shares is taxable. Please consult your financial advisor to determine the option that is best suited for your personal financial situation and goals.
19. WHAT IS THE ROLE OF THE LABOUR SPONSOR IN AN LSIF?
The labour sponsor usually has a presence on an LSIF’s board of directors, and the labour sponsor's role is to ensure that LSIF shareholders' interests are being served.
20. WHAT IS THE ROLE OF THE FUND’S ADMINISTRATOR?
The administrator's role is to oversee all administrative items such as client services, tax credit generation and maintenance of shareholder databases. The JovFunds’ LSIF administrator, Felcom Data Services, is also a strong strategic partner. Our LSIF shareholders benefit from the economies of scale and efficiencies achieved through this strategic relationship.
