Venture Capital and Labour-Sponsored Investment Funds
Venture Capital is commonly defined as money provided by
professionals who invest alongside the management teams of
young, growing companies that have the potential to become
significant economic contributors. Venture capital is responsible
for major societal breakthroughs across areas as diverse as
medicine and electronics. VC investments in information technology
(IT) have yielded fundamental improvements to society through
creations such as the microprocessor, personal computer, wireless
communication, and the internet infrastructure.
Venture capital drives innovation, job creation, and economic
growth. Indeed, a recent report concluded that a job is created
by every US$36,000 spent by venture capitalists. Venture capital
is a growing industry in Canada.
Labour-sponsored funds have emerged in Canada as a distinct
form of venture capital. Federal and provincial governments
have recognized that venture capital is essential to the financing
of the innovative process. As a result, they offer tax credits
to Canadians to entice them to invest in labour-sponsored
investment funds. The funds, in turn, must invest only in
eligible businesses which are broadly defined as small to
medium Canadian enterprises.
Axis Investment Fund offers a combined 35% tax credit. Most
labour-sponsored investment funds offer a 30% tax credit.
Labour-sponsored funds offer benefits beyond a tax credit,
for example:
- access to private company deals which offer the potential
of higher returns than other investment choices such as
mutual funds
- a portfolio diversification structure that reduces the
risk of investing in private company equity by spreading
the investment risk across a number of investments and investment
sectors
- a professional management team that sources, filters and
monitors the investments on behalf of the fund
- RRSP eligibility which also allows the RRSP holder to
increase their foreign content limits, thereby providing
even more tax benefit and a further diversification opportunity
within the RRSP holder's total investment portfolio.
Take a look at the tax savings and potential return scenarios
of a $5,000 investment in Axis Investment Fund after eight
years.
Tax Savings(5) |
Amount Invested |
|
Less: Tax Credit (35%)(1) |
|
Net Cost Outside of RRSP |
|
Less: RRSP Tax Deduction(2) |
|
Net Cost Inside of RRSP |
|
|
Return Scenarios(4) |
Amount returned
inside
RRSP at end of year 8(3) |
Annualized investment return
|
$2,500 |
13.2% |
5,000 |
23.4% |
7,500 |
29.8% |
10,000 |
34.6% |
|
Click here to view a Tax Savings
chart for all income levels.
Notes:
(1) The ROIF investment is held for eight years and earns
the federal and provincial tax credits.
(2) The marginal tax rate used is 46.40%.
(3) The “Amount returned” column provides four
illustrative scenarios of a shareholder receiving various
amounts of capital upon redemption.
(4) The returns shown above are pre-tax returns. The final
after-tax return will depend upon the individual investor’s
marginal tax rate.
(5) Some limitations apply, please refer to the prospectus.
A redemption fee may apply. New shares must be held for eight
years to avoid repaying tax credits. Tax credits are non-refundable.
Income tax is payable on all amounts withdrawn from an RSP.
These tax credit rates are applicable for the taxation year
2002. Fund avalaible in Ontario only.
|
