What it means
The idea behind an LSVCC was to point everyday savings towards young companies that struggle to raise money from banks, while giving workers a stake in local job creation. The fund is sponsored by a union or labour organisation, but the money comes from individual investors who buy shares in the fund.
A professional team then chooses which small businesses to back. To encourage people to invest in such a risky area, governments offered tax credits to buyers, often at both the federal and provincial level.
The credit reduced the net cost of the investment, so a saver putting in a certain amount paid less after tax. In return, investors were usually asked to hold their shares for several years, and early redemption could cause the credit to be clawed back.
For a finance reader, the key point is that the tax credit is not the same as investment performance. A fund can lose value even though the investor received a credit, and the credit can only offset part of a loss.
The headline return of the underlying portfolio of small companies is what ultimately decides whether the saver comes out ahead. Many LSVCCs have had mixed results, partly because they were required to invest in small, unlisted businesses that are hard to value and hard to sell.
Fees were often higher than those of ordinary mutual funds. Combined with reductions in the credits, this has led to a smaller role for the structure over time.
If you come across the term today, it will mostly be in discussions of Canadian tax policy, venture funding or the history of retail venture capital. Check the current provincial and federal rules before drawing any conclusions about a specific fund.
In practice
Real-world examples.
Example
A nurse in her forties is told by an adviser that buying shares in an LSVCC will cut her tax bill this year. She checks the holding period, which is several years, and asks what happens if she needs the money earlier. She decides to put only a small portion of savings into it.
Example
A small Canadian software firm receives a $2,000,000 investment from an LSVCC. The fund takes a seat on the board and helps the firm hire a finance manager. Five years later the firm is acquired, and the fund sells its stake at a profit.
Example
A financial planner reviewing a client's portfolio notices a holding in an old labour-sponsored fund that has traded well below its purchase price for years. The planner explains that the tax credit received at purchase did not protect the client from the poor performance of the underlying investments.
Formula
Calculation
Net cost of investment = Amount invested x (1 - combined tax credit rate)
Assume, purely for illustration, that the combined credit is 30%. An investor puts $10,000 into the fund. The credit is 10,000 x 0.30 = $3,000, so the net cost is 10,000 - 3,000 = $7,000. If the shares later fall in value to $6,000, the investor is down only $1,000 compared with the $7,000 net cost, but is still down $4,000 compared with the amount originally invested. If the shares are redeemed early and the credit is clawed back, the investor would lose the $3,000 benefit as well.Case study
Seen in the real world.
Northern Timber Workers Venture Fund is an illustrative, fictional LSVCC set up by a regional union to back small manufacturers. It raised $60,000,000 from thousands of members, each of whom received a tax credit on purchase. The fund invested in twenty firms, most of which were unlisted and slow to grow.
After eight years, the fund reported that about a third of its investments had failed, a third had returned roughly their cost and a third had delivered good profits. Unit values ended slightly below what investors paid, though the tax credit meant that many had a small gain overall. The illustrative lesson was that the credit made the fund affordable but did not remove the risk.
Watch out
Common mistakes.
- Treating the tax credit as guaranteed profit, when it only reduces the cost of the investment and does not protect against losses.
- Ignoring the holding period, even though redeeming early can mean paying back the credit.
- Assuming the rules are fixed, when governments have repeatedly altered or withdrawn the credits over time.
Questions
People also ask.
Who runs the investments in an LSVCC?
A professional fund management team selects and monitors the small businesses, while the sponsoring labour body usually has a governance and branding role.
Why were the funds sold to ordinary savers?
The aim was to channel retail savings into small business growth and local job creation, and the tax credit was the incentive to take the extra risk.
How is an LSVCC different from an ordinary mutual fund?
It invests mainly in small, unlisted businesses, is tied to a sponsoring labour organisation, usually carries a minimum holding period and has often charged higher fees.
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