You have probably started collecting your tax slips and wondered about ways to reduce your income tax. Most Canadians know that Registered Retirement Savings Plan (RRSP) contributions are the main focus for last minute tax reduction strategies. However, there is another option to get a tax break on last year’s income.

You can reduce your taxes and participate in tomorrow’s emerging industries through a purchase of a Labour-sponsored investment fund (LSIF). LSIFs are becoming especially popular for last-minute tax planning. Just like the RRSP, these funds can be purchased until March 3, 2003 to receive a tax credit for 2002.

Labour-sponsored investment funds are specialty mutual funds providing smaller companies with venture capital. These newer companies are usually involved in developing exciting new products in fields such as biotechnology, software and alternative energy. They often need outside investors to help fund these important scientific and technology breakthroughs.

Microsoft, Intel and Cisco are examples of successful companies originally funded by venture capital. Investors in these once-small companies have become very wealthy by getting in early. As well, various levels of government understand the importance of funding scientific research and development in Canada, and thus they provide incentives by way of tax credits.

Ontario residents receive a 30 to 35% tax credit on a maximum investment of $5,000. Depending on the fund the credit is 15% from the federal government and 15 to 20% from the province. This represents a $1,500 to $1,750 tax reduction. You will receive an additional tax break by registering your fund as a RRSP. People in the highest income bracket could find their net cost after tax breaks to be as little as $1,000. There is a catch however. The government will tax back the LSIF credits if you sell your fund within the eight-year holding period.

No investment strategy should be solely guided by the desire to reduce taxes. There are many Labour-sponsored investment funds available. Speak to a qualified financial planner to help you navigate this specialized area of investing and reduce your taxes at the same time.

Some Restrictions apply to the purchase of Labour Sponsored Funds and they may not be suitable for all investors. Read the prospectus before investing.

This is a monthly article on financial planning. Call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., of Fundex Investments with your topics of interest at 798-2421 or E-mail at rick@invested-interest.ca.