Many Canadians select mutual funds for their RRSP decisions. A mutual fund is an investment where people pool their money, and allow a professional manager to make buying and selling decisions based on specific objectives. Similarly, a Labour-Sponsored Investment Fund (LSIF) purchases shares in small- to medium-sized Canadian businesses.

The businesses found in a LSIF are usually in their early stages of development. Therefore, more risk and uncertainty is inherent. The government also knows that these companies help to stimulate job creation and economic growth.

The Federal and Provincial Governments help minimize the added risk and encourage people to place their money in Labour-Sponsored funds by offering tax credits. With a maximum investment of $5,000, Ontario residents will receive a credit of 30% (15% from each government). Certain research-oriented funds in Ontario receive an extra 5% credit from the province. If you register this as part of your RRSP, you will get an additional tax break.

For example, assume you are in the 40% tax bracket and make a $5,000 LSIF purchase as a RRSP. You will receive $1,500 in tax credits plus an additional $2,000 in tax savings for a total tax reduction of $3,500. If your fund is research-oriented you get an additional $250 from the Ontario government. Your net investment is $1,250 to $1,500. Does it seem too good to be true? There is a minor catch - if you sell your fund within the eight-year holding period, the government will tax back your LSIF credits.

Time is running out for RRSP contributions to count toward your 2003 tax return. Labour-Sponsored Investment Funds are an excellent way to diversify your portfolio and save taxes at the same time. Some restrictions apply. Labour-Sponsored funds may not be suitable for everyone. Read the prospectus before investing and speak to your financial planner today to better understand your RRSP and tax savings options.

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.