| LABOUR
SPONSORED INVESTMENT FUNDS
What Type of Investor Should Consider a LSIF?
- Someone who is seeking immediate tax relief and plans to hold
the investment for the long term (at least 8 years).
- Investors that are looking for an investment that is more
aggressive and has high potential growth opportunity but are
willing to accept the additional risk that comes along with
the potential higher reward.
- Someone who does not require this investment to be liquid.
How Long Must I Hold My LSIF?
- LSIF investments made after March 5, 1996 must be held for
a minimum of 8 years to avoid having to repay the full amount
of tax credits upon redemption.
What is the Maximum Amount I Can Contribute
to a LSIF in Any One Year?
- There is no limit to the amount you can contribute a LSIF
in any one year, however the maximum amount eligible for the
tax credits in any one tax period is currently $5000.
How Do the Tax Credits Work?
- The maximum investment that is eligible for a tax credit in
any one year is currently $5000.
- Federally registered LSIFs receive a 15% tax credit on their
investment in the year the investment is made.
- In Ontario investors also have the potential to receive either
a 15% or 20% tax credit on their LSIF investment, the extra
5% is dependant on whether the LSIF is classified as a research
orientated fund.
- The investor must hold onto any LSIF investments made after
March 5, 1996 for a minimum period of 8 years or they will be
required to repay the full amount of tax credits they received.
| |
Labour-Sponsored Fund |
Research & Development
LSIF |
| Investment Amount |
$5000 |
$5000 |
| Federal Tax Credit |
15% (750) |
15% (750) |
| Provincial Tax Credit |
15% (750) |
20% (1000) |
| RRSP Refund |
46.4% (2320) |
46.4% (2320) |
| (Max MTR- ON) |
|
|
| Net Cost of Investment |
$1180 |
$930 |
How do I Claim my LSIF Tax Credits on My Tax
Return?
- Submit Part 2 or 3 of the Federal Tax Credit Certificate
(T5006)
- Enter the net cost of shares purchased before March 1st
on Line 413 of your T1 Tax Return
- On Line 414 enter the total of Line 413 *15% (maximum of
$750)
- Submit Part 1 of the Ontario Tax Credit Certificate (OIEO)
- On Line 18 enter the cost of shares purchased before the
RRSP deadline for the year * 15% (maximum of $750)
- Enter sum of Lines 18, 19 and 20 on Line 21 for total
OIEO tax credit.
Note: that this information has been taken from information
provided by the labour funds and is subject to change.
Can LSIFs Be Held in an RRSP?
- Yes, LSIFs are eligible investments for RRSPs. The investor
should first contribute money to their RRSP and then make the
LSIF investment to optimize the tax credits.
Can LSIFs Be Held with Other Investments?
- Yes, if LSIFs are held within an RRSP account the LSIF will
actually increase the foreign content permitted in the LSIF
by $3 for every $1 of small-business property owned to a maximum
of 50% foreign content for that investment account.
What Other Factors Should I Consider When
Selecting a LSIF?
- Check the MER, the MERs will be higher than for regular mutual
funds because of the higher risk, the abundance of research
conducted before selecting companies to invest in, and because
a successful manager of a LSIF will usually take a very active
role in the business of the company, for instance providing
input on company decisions.
- How long has the LSIF been in existence, this is important
since the companies that the LSIF invest in generally require
a number of years before successes materialize, thus you want
to make sure that not all of the companies in the LSIF are only
in the initial phases of research and development.
- Consider the number and type of companies that the LSIF invests
in, as you want a fund where the money is going towards a number
of different projects and companies to provide additional protection.
Excellent Returns for Most Investors in High
Tax Brackets
LSIFS Held in an RRSP
| LSIF Investment
|
$5,000 |
$5,000 |
$5,000 |
| Estimated Return |
5% |
0% |
-5% |
| Tax Refund Rate |
78% |
78% |
78% |
| Total Cash Investment |
$1,100 |
$1,100 |
$1,100 |
| Investment Value
at End of 8 Years |
7,387 |
5,000 |
3,317 |
| Fund Proceeds |
7,387 |
5,000 |
3,317 |
| Tax on Gain |
0% |
0% |
0% |
| Net Proceeds |
7,387 |
5,000 |
3,317 |
| RSP Redemption
Tax Rate |
48% |
48% |
48% |
| Final Value |
$3,841 |
$2,600 |
$1,725 |
| Avg. Annual Return |
16.9% |
11.4% |
5.8% |
LSIFS Held Outside an RRSP
| LSIF Investment
|
$5,000 |
$5,000 |
$5,000 |
| Estimated Return |
5% |
0% |
-5% |
| Investment Vehicle |
Non RSP |
Non RSP |
Non RSP |
| Tax Refund Rate |
30% |
30% |
30% |
| Total Cash Investment |
$3,500 |
$3,500 |
$3,500 |
| Investment Value
at End of 8 Years |
7,387 |
5,000 |
3,317 |
| Fund Proceeds |
7,387 |
5,000 |
3,317 |
| Tax on Gain |
24% |
0% |
0% |
| Net Proceeds |
6,814 |
5,000 |
3,317 |
| Final Value |
$6,814 |
$5,000 |
$3,317 |
| Avg. Annual Return |
8.7% |
4.6% |
-0.7% |
Assumptions for Above Calculations
- Marginal Tax Rate Used = 48%
- Capital Gains taxed at 50% of the MTR
- LSIFs held for minimum 8 year holding period to avoid 30%
tax credit repayment.
- You are eligible for the full tax credits of 30%
- Average annual return assumes growth on total cash invested
over the holding period
*Please note these on only projections based on certain assumptions
and information available in 2002. Unit values and returns will
fluctuate based on market conditions and you should consult the
fund prospectus for comprehensive details on risk factors, tax
refund rates and other pertinent information before choosing a
LSIF.
This material is for information purposes only and should
not be construed as legal or tax advice. Every effort has been
made to ensure its accuracy, but errors and omissions are possible.
Individual circumstances may vary and specific legal and tax advice
is recommended. Future tax changes and market conditions may affect
this information.
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