Managed Money Reporter Newsletter — Issue 142, December 1998


Editors: Carl Spiess & Allan McGlade



Labour Sponsored Funds Enhanced for 1998!

By Ron Pante

What is a Labour Sponsored Investment 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.

A 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. However, as the LSIF portfolio will include several private companies, it will inherently involve a slightly higher risk than traditional mutual funds (see recent performance numbers). 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. For the long-term investor, investment in a LSIF can reduce the tax burden, while providing the potential for above average returns. See "Tax Benefits and Investment Returns from LSIFs".

Enhancements for 1998

Enhancements by the Federal and Provincial Governments to LSIF legislation have made this investment vehicle even more appealing for the 1998 tax year. The three key changes to the tax treatment of LSIF's are:

  • The maximum annual investment eligible for a tax credit has been changed to $5,000 (an increase from $3,500) for 1998 and subsequent tax years. The 15% federal and 15% provincial tax credits remain unchanged.

    Next Issue:

    Watch for the January issue featuring our review of the 1998 investment season

    • Effective for 1998 and subsequent taxation years, the 'cooling-off' period has been lifted. Thus when an investor redeems a LSIF, they no longer have to wait the mandatory 3 year period to invest in more LSIFs and obtain the tax benefits of investing in labour funds.
    • LSIFs held in a RRSP may result in increases in foreign content room above the usual 20% limit. The additional foreign content that is permitted is 3 times the book value of the labour fund assets in your account to a maximum of 40% of your plan. However, due to system limitations at ScotiaMcLeod, we will only be able to accommodate the usual 20% foreign content room. Should you opt to utilize more, you will need to prearrange with us, so we can ensure that foreign content taxes are not charged.

    For Example:

    Suppose you purchase $5,000 of a LSIF in 1998 in an existing RRSP account with a total book value of $20,000.

    LSIF Purchase$5,000.00
    Federal Tax Credit$750.00
    Provincial Tax Credit$750.00
    Total Tax Credit$1,500.00

    Pre-LSIF Foreign Content Limit - $4,000 (20% of book value)

    Additional Foreign Content Room with 1998 $5,000 LSIF purchase -$15,000 ($5000x3)

    Maximum Foreign Content capped at 40% - $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 or retired.

    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 email us at carl.spiess@scotiawealth.com.

    New Year's Eve for Mutual Funds

    December 31 in the Mutual Fund Industry is noted as dividend day. This is the day that, with a few exceptions, dividends are paid out on mutual funds, be they international and equity funds (annual payout), balanced funds (quarterly payout) or money market funds (monthly payout). Below is an example of how this distribution may affect your holding:

    Date Price Shares Market Value
    March $5 2,000 $10,000
    Dec 31 $6 2,000 $12,000
    Jan 1 $5 2,400 $12,000
    While at first glance at the price per unit in the financial pages it would seem that the value of your investment has gone down, in fact you now have more units from the dividend distribution, so the value of your total investment remains intact. In the example the unit value is the same as it was 9 months earlier but your total investment has increased by 20%!

    Manulife's GIF Closes Its First Chapter

    Manulife Financial has announced that it will be closing its very attractive GIF product to new investors on December 31 of this year.

    Following the success of the GIF product, Manulife will be launching the next generation - GIFencore. While this will be similar to the original GIF, it is expected that certain features will not be as attractive.

    For investors wanting to make a first time purchase of the original GIF product with this year's RRSP contribution, you will need to do so before the December 31st cutoff. For more information please contact Allan McGlade at (416) 862-3066 or 1-800-387-9273 or allan.mcglade@scotiawealth.com.

    Fund News

    Pending shareholder approval, BPI has proposed that their closed end fund, the Canadian Opportunities II Fund be renamed to the Global Opportunities II Fund.

    Mackenzie has announced the addition of the "C" units, which will include the Cundill funds.

    Dundee Mutual Funds launches the Dynamic Canadian Resource Fund.

    Guardian Mutual Funds have announced several changes to their funds including:

    • Guardian Asia Pacific Fund - change of mandate
    • Guardian Canadian Balanced Fund - change of management
    • Guardian Emerging Markets Fund - change of management
    • Guardian Enterprise Fund - change of mandate
    • Guardian International Balanced Fund - change of mandate

    For additional information on these or other mutual funds, please call our Service Centre at (416) 863-7777 or 1-800-387-9273 or at carl.spiess@scotiawealth.com.

     



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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