Managed Money Reporter Newsletter — Issue 178, December 2001


Editors: Carl Spiess & Allan McGlade


Featured Articles


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LSIFs – Is the extra risk worth the tax benefits?

Over the past few years we have had considerable volatility in the markets. If you have been invested over this period you will likely have noticed this in your own portfolio, especially if you have just started out over the last few years or if you invested in securities that had more risk attached to them.

Labour Sponsored Investment Funds (LSIFs) were not unaffected by this instability. In fact, if you were already a holder of these funds, they may have been the hardest hit in your portfolio. This is the reality of Venture Capital Investments as they are simply higher risk.

The GOOD News is that in purchasing a Labour Sponsored Investment Fund you would have received a considerable tax break. This tax break would have made your overall net worth higher due to the fact that the government either reduced your taxes or gave you a refund of up to $1,750, which you could use in the subsequent year to bring yourself further reductions/refunds. The significance of that tax reduction/refund shows that many clients who purchased an LSIF in these very volatile markets have at least broken even. For example, as of September 30th , 2001, the BEST Discoveries Fund, a technology based LSIF, that we have recommended for a more aggressive position, was showing figures down 24% over the year while the TSE 300 had shown declines of 33% over the last year. Considering this, had you purchased a comparable tech based, non-LSIF investment – your investment would likely be down, with no real advantage other than not being locked into the investment and perhaps a little less volatility – depending on where you invested. Had you been interested in investing in technology for the long-term, the BEST fund would have been a safer bet than a regular tech-based mutual fund. The other good news, either way, is that time is on your side. The longer you hold an investment, the more likely you are to have gains on it. The most movement and risk in a mutual fund or Labour Sponsored Investment Fund usually occurs within the first few years of investment. Patience is key to all types of investing. If you have the time frame to work with and don't mind some fluctuations, LSIFs may be right for you. As far as we are concerned, as long as the government is offering free money – we'll take it.  

LSIF Investment vs. Regular Mutual Fund Investment

Investments Initial
Investment
Tax Credit
Return
1 Year Returns
as of Oct 31, 2001
Net Value
to you
Average Labour Sponsored Fund $5,000 $1,500 -13.6% $5,820
Average Canadian Small Cap Fund $5,000 N/A -14.4% $4,280

LSIF Investor Profile

This investment may be right for you if you are an investor who:

  • Has maximized RRSP contribution room and are looking for additional tax savings ideas  

  • Is interested in potentially incurring above average returns over the long-term  

  • Would like to increase foreign content room in your RRSP  

  • Would like to get the most tax savings possible out of RRSP contributions and doesn't mind a long-term investment (usually 8 years)

If any of the above apply to you and your investment goals, you should consider adding this investment to your portfolio!

Quick Refresher – 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 small companies who turn to Labour Sponsored Venture Capital Corporations for their financing needs.

In return for creating jobs and promoting economic growth through your investment in these companies, the government provides a tax credit of 30-35% of your investment amount up to $5,000. For additional information on LSIFs – visit our website: www.mutualfundreporter.com/lsif or see back issue MFR 165 – November 2000 or this month's LSIF insert (.pdf 33k).

Double Your Tax Savings When Purchased In an RRSP

When an LSIF is purchased inside an RRSP, you benefit from substantial tax savings. If you were to deposit $5,000 into your RRSP account, the government will reduce your taxes anywhere from $1,110 to $2,320 – the greater your income and tax bracket, the greater your tax refund/reduction. If you invest that $5,000 in an LSIF, you can receive an additional $1,500 to $1,750 in federal and provincial tax credits. The end result is that your $5,000 investment required an initial investment of less than half of that amount.

For Example: (Assuming a $5,000 RRSP Contribution with an LSIF Purchase)

 

Regular LSIF

  Ontario Biotech LSIF

LSIF Investment$5,000$5,000
15% Federal Tax Credit$750$750
15-20% Prov. Tax Credit$750$1,000
RRSP Tax Savings (@50%)$2,500
----------------
$2,500
----------------
Total Tax Savings$4,000$4,250

Increase Your Foreign Investment Exposure

A larger foreign content position provides for added diversification and the potential for greater returns from exposure in larger foreign markets and sector specific investments. When you hold an LSIF in your RRSP account, your foreign content room increases above the basic 30% limit. The additional foreign content that is permitted is 3 times the book value of the LSIF assets in your account, to a maximum of 50% of your plan's overall book value.

For Example: Suppose you purchase $5,000 of a LSIF in 2001 in an existing RRSP account with a total book value of $20,000:

  1. Pre-LSIF Foreign Content Limit = $6,000 (30% of book value i.e. 30% of $20,000)

  2. Additional Foreign Content Room with $5,000 LSIF purchase = $15,000 ($5,000 x 3)

  3. Maximum Foreign Content capped at 50% = $10,000 (50% of $20,000)

Rollover Option and Redemption Restrictions

Rollover Option

If you currently hold shares in an LSIF purchased before March 5th, 1996, you can elect to ‘Rollover' these shares into the same LSIF or another one of your choice and re-claim tax credits for the 2001 tax year. This is an ideal option for those of you who have maximized your RRSP contributions for the 2001 tax year. For the clients of Carl Spiess who qualify for this rollover opportunity, you will be contacted shortly with options and instructions.

Redemption Restrictions

Purchased before March 5th, 1996: Units redeemed prior to the 5 year anniversary 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 LSIFs available to you, refer to the handy insert. For more information, please call our Service Centre at: (416) 863-7777 or 1-800-387-9273 or visit our website at: www.mutualfundreporter.com/lsif.

Fund News

StrategicNova has terminated a few of their funds: the Eurotech fund, US High Yield Bond U$, US Midcap Growth, World Bond and World Tech funds. If you hold these funds, you may have been moved into their money market fund. Call our office if you would like suggestions for reinvestment.

AGF has announced that effective December 15th, 2001 they will be merging the AGF Canadian Aggressive Equity and AGF Canadian Opportunities into the AGF Canadian Aggressive All-Cap Fund.

Team News

Effective this month, Jane-Ann Crombeen and Brenda Petrunick, longstanding members of our team, have gone on maternity leave. We wish them both all the best and a great year. Nalini Singh who is currently on maternity leave will be returning in January, 2002.

 



Contact Us

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

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