For more than a decade, Ontario residents have been compensated with federal and provincial tax credits of 30 to 40% when purchasing Labour Sponsored Investment Funds (LSIFs). The credit was dependant on what fund was purchased and when the investment was made. On August 29, 2005, the Ontario Ministry of Finance announced that they plan to cancel their portion of the tax credit.

The Ontario credit began in 1991 as a means to encourage investments in start-up companies, mainly in the areas of hi-tech and biotechnology, during a time when our country was in a recession. The idea of the tax credit was to promote small companies and provide a source of financing that might otherwise be unavailable. The maximum investment that individuals could make to receive the credit was $5,000.

Finance Minister Greg Sorbara says, “Ontario’s venture capital market is much healthier now, and we believe that this incentive is no longer the best fit in today’s economic and fiscal climate.” Needless to say, most Labour Sponsored fund companies disagree. They believe that Ontario investors will be less likely to buy into venture opportunities without the tax incentives. They also say that foreign interest will wane without a strong domestic market.

Some are speculating that this measure could cause a slump in the Venture Capital sector and a decline in research-oriented small businesses in the province of Ontario. The government further argues that they will save approximately $40 million per year.

It is true that tax credits should not be the only reason to buy LSIFs, but they certainly help balance out the extra risk associated with these types of investments. It also allows the average taxpayer the opportunity to participate in these start-up opportunities, normally reserved for the wealthy and institutional investors.

With the potential removal of these incentives, it is easy to envision a decline in new start-ups for years to come. The Ontario government has been consulting with the Labour Sponsored fund industry to determine how the funds will move forward. If you feel strongly about this issue, it would be worthwhile to contact your local MPP and voice your opinion.

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.