FAQ

What is an LSIF (Labour-Sponsored Investment Fund)?

LSIFs are mutual funds as defined by securities legislation mandated to invest in small and medium sized Canadian businesses. The purchase of these funds generates federal and provincial tax credits. These funds are established under the Federal income tax act and registered federally and may also be registered provincially. Each LSIF fund must be sponsored by a labour organization (e.g. Canadian Police Association).
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What are the criteria for investing in companies and selecting investments?
  • Maximum of 500 employees, 50% or more of them are employed in Canada
  • Total firm assets not to exceed $50 million
  • Domestically and provincially domiciled companies

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What is the difference between an LSIF and a regular mutual fund?
  • LSIFs have less restrictive investment polices relative to mutual funds in that they may hold more than 10% of the voting securities of any investee company while mutual funds are restricted to a maximum of 10% the voting securities of their NAV in any single investment.
  • Investee companies are mostly private and early stage and are therefore characterized as illiquid
    and speculative.
  • LSIFs requires a longer holding period as tax credits require an 8 year hold to avoid any tax credit claw back (few exceptions apply).
  • There are limits for LSIF redemptions as tax credits are clawed back for early redemptions, and there are instances where funds may suspend redemptions.
  • The investment manager of LSIF funds generally play a role in the operation of the investee company usually by holding a directorship or another executive post within the firm.
  • Qualified Independent Valuators, usually annually,review the value of the portfolio.
  • LSIFs may both invest in publicly traded firms and continue to hold firms that were once private that have had IPOs. These positions are usually held at a discount to market value reflecting possible trading restrictions on the fund.

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What are the advantages of LSIFs?
  • LSIF investors gain access to private company investing otherwise unavailable.
  • Private investments have the potential for tremendous growth opportunity.
  • The tax-credit advantage applicable to the first $5000.00 on each purchase. Federal credits of 15% and Provincial credits of 5%. For investors in Ontario, the 15% Federal Tax Credit applies to a purchase of up to $5,000 per annum and the 5% Provincial Tax Credit applies to a purchase of up to $7,500 per annum.

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What are the disadvantages of LSIFs?
  • MERs are significantly greater than regular mutual funds.
  • The market to purchase and sell the securities of a private firm is very illiquid. This can materially impact the selling price of security held by the LSIF and the liquidity of the fund.
  • Start-ups and junior companies present a high degree of business risk and have a greater probability
    of failure.
  • Given the tax credit enhancement, investors are locked into an eight year holding period that if breached will result in tax credit claw backs.
  • LSIFs will hold a portion of their portfolio in liquid assets to meet anticipated redemption requests. This results in a money market like result for that portion of the portfolio squeezing overall returns.
  • LSIFs are not suitable for investors who intend to use their RRSP savings towards the HBP (homebuyers program) or the LLP (Live long learning program) as these are essentially withdrawals that disturb the potential growth of the LSIF, and trigger the tax credit clawback.

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Who are LSIFs suitable for?
  • Investors who have a longer investment time horizon greater than 8 years. LSIFs have their greatest investment potential given long holding periods. Ideally, LSIFs work in RRSP accounts of investors up to
    age 55.
  • LSIFs are suitable for investors who are comfortable taking on high-risk investments in their RRSP accounts.

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Can LSIF investments be made in an RRSP?

LSIF investments can be made in both RRSP accounts and open/non-registered accounts. ˆtop

How much do I receive in tax credits when investing in an LSIF?

Tax credits are split between Federal 15% and provincial usually 5% - 15% depending on your province.
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Do I lose any tax credits if I redeem my LSIF investment?

Claw backs apply to redemptions done before the specified period that require the investor to return the tax credits gained from the purchase split between Federal 15% and provincial usually 5 - 20% depending on your province. LSIF investors who have become disabled or terminally ill can redeem without repayment of tax credits.
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What are performance fees?

LSIFs often have performance fees associated with them. Above a stated hurdle rate of return, the managers are entitled to certain percentage of the return in excess of the hurdle rate.
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