Managed Money Reporter Newsletter — Issue 154, December 1999


Editors: Carl Spiess & Allan McGlade


Featured Articles



Labour Sponsored Funds Growing in Acceptance

By Ron Pante

Since 1991 the Mutual Fund Reporter has informed our clients of the benefits of Labour Sponsored Mutual Funds, specifically for their immediate tax savings and credits, as well as their potential for above average returns. During the first few years following their introduction into the Canadian mutual fund marketplace, these Labour Sponsored Funds incurred modest returns, while providing substantial tax savings. However, these funds have evolved over the recent years encompassing the changing nature and scope of the industries in the Canadian economy, and are now incorporating promising young science and technology companies with breakthrough potential into their investment portfolios. Now, as these Labour Sponsored Funds continue to grow and mature, they have incurred above-average returns on top of their significant tax savings. Our top picks for this year are shown, below.

Mutual Fund Reporter’s 1999 Recommended list Performance
(as of September 30, 1999)

  Rtn% Rtn% Rtn% Rtn% Risk Ratio
LSIF YTD 1 Yr. 2 Yr. 3 Yr.
Dynamic Venture Opportunities Fund 64.5 64.8 11.9 12.9 N/A
Centerfire Growth Fund Inc. 11.2 9.4 1.7 - N/A
Triax Growth Fund Inc. 7.1 21.3 4.4 3.9 3.45
Vengrowth Investment Fund 5.5 21.9 12.0 12.0 2.35
Working Ventures Canadian Fund 3.9 4.3 2.2 2.0 1.90

What is a Labour Sponsored Fund?

A Labour Sponsored Investment Fund (LSIF) is a venture capital fund that invests in small and medium sized Canadian businesses. When we consider that over 99% of Canada's businesses operate with less than 500 employees, we can see that small business plays a significant role in the Canadian economy. It is these same small companies who turn to Labour Sponsored Venture Capital Corporations for their financing needs.

An LSIF is similar to a mutual fund, where individual investors pool their money, allowing professional investment managers to make decisions on their behalf. By having investments in several different companies through the mutual fund, the individual investor has reduced overall investment risk.

Contact us, or your employer, to see if you are eligible to do payroll deductions; if not, we can set you up with a 'PAC' plan. There are no fees to get involved.

Key Benefits Of Labour Sponsored Funds

Investing in a Labour Sponsored Mutual Fund inside an RRSP brings to the investor 3 key benefits that traditional mutual funds do not. These are:

  • The potential for above-average returns.
  • A 30% Tax Credit (15% Federal & 15% Provincial) on the amount purchased to a maximum of $5000.00 (minimum $500).
  • An increase in Foreign Content room by three times the book value of the Labour Sponsored Fund to a maximum of 40% of the account's book value, instead of the traditional 20% foreign content limit.

The Potential For Above Average Returns

Since a Labour Sponsored Investment Fund will have the majority of its portfolio invested in several private companies (small to medium-sized) that are in the early stages of their development and may be on the verge of becoming public, it will inherently involve a slightly higher risk than traditional mutual funds. But as investors have come to realize, along with higher risk comes the potential for greater or above average returns.

Benefit From Substantial Tax Savings When Purchased In An RRSP

To reward the investor for taking on this additional risk, both the Federal and Provincial Governments offer favorable tax benefits in the form of tax credits. When you purchase an LSIF, you receive both a 15% Federal and 15% Provincial Tax Credit on top of your RRSP contribution benefit.

For Example:
(Assuming a $5000 RRSP Contribution with an LSIF Purchase)

LSIF Investment $5,000
15% Federal Tax Credit 750
15% Provincial Tax Credit 750
RRSP Tax Savings (@ 50%) 2,500
Total Tax Savings $4,000

Increase Your Foreign Content Limit

LSIFs held in an RRSP may result in increases in foreign content room above the usual 20% limit. A larger foreign content position provides for added diversification and the potential for greater returns from exposure in larger foreign markets. The additional foreign content that is permitted is 3 times the book value of the LSIF assets in your account to a maximum of 40% of your plan's overall book value.

For Example:
Suppose you purchase $5,000 of a LSIF in 1999 in an existing RRSP account with a total book value of $20,000.

Pre-LSIF Foreign Content Limit
(20% of book value i.e. 20% of $20000)
$4,000
Additional Foreign Content Room with 1999 $5000 LSIF purchase
($5000x3)
$15,000
Maximum Foreign Content capped at 40%
(40% of $20000)
$8,000

Redemption Restrictions

Purchased up to March 5th, 1996
Units redeemed within 5 years of purchase require the return of the tax credits to both the Federal and Provincial Governments. Exceptions are made for individuals 65 years of age, retired or cease to be residents of Canada.

Purchased after March 5th, 1996
Units must be held for 8 years for ALL shareholders, or repayment of the tax credits will apply

For a complete overview of the LSIF's available to you, see our Annual Review of Labour Sponsored Investment Funds. For more information, please email us or call our Service Centre at (416) 863-7777 or 1-800-387-9273.

Fund News

Scotia Funds has introduced two new funds:

  • Scotia Canadian Bond Index
  • Scotia International Stock Index

Both funds, as with all other Scotia Funds, are offered at no load.

AIM has introduced their new RRSP-eligible funds:

Happy Holidays!
  • AIM RSP American Premier
  • AIM RSP European Growth
  • AIM RSP Global Bond
  • AIM RSP Global Growth & Income
  • AIM RSP Global Theme

Synergy has also introduced two new funds:

  • Synergy Global Momentum RSP Fund
  • Synergy Global Style Management RSP Fund

 



Contact Us

T.  416.863.RRSP (7777)
     1.800.387.9273
F.  416.863.7479
E. carl.spiess@scotiawealth.com
    allan.mcglade@scotiawealth.com

ScotiaMcLeod is a division of Scotia Capital Inc., member of CIPF.

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