My first foray into investing was putting $5,000 into a labour-sponsored investment fund (LSIF) in early 2000. Nearly eight years later, the original stake is now worth $2,000. If you add the initial $1,500 tax-break, the capital loss over eight years is 30%. That’s not as bad as some other stinkers I’ve owned but the lack of liquidity even after I realized that venture capital funds are dogs always rankled me.
The general rule for redeeming LSIF shares is eight years from the date of purchase. However, if the eighth anniversary of the purchase falls within the second 30 days of the calendar year, you are allowed to redeem up to 30 days before the anniversary date. You are also allowed to reinvest eight years less one month from the date of purchase (who comes up with these complicated rules?). I purchased the LSIF shares on 28th February 2000, so I would be able to redeem the shares on 29th January 2008 without having to pay back the tax credits. I only wish I had bought the LSIF shares in my investment account instead of my RRSP because I would at least have a capital loss to offset gains elsewhere.
Note: If you get a chance check out The Globe and Mail’s new Globe Investor Magazine. There are lots of interesting articles worth reading, especially the ten commandments of investing by Rob Carrick.
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8 responses so far ↓
1 0xCC // Nov 22, 2007 at 8:20 am
LSIF are a tricky thing. I bought some LSIF in 2004 so I am only about 50% of the way through the holding period but my original $5000 investment is now worth $5800 and if you add in the $1500 tax credit it hasn’t been a bad investment. When I put the money into the fund in the first place I was just hoping that I would have my original $5000 left in it after 8 years.
I don’t think I would invest in a LSIF again though. The tax perks aren’t as good as they used to be and on average as a group they don’t really perform that well compared to the rest of the market.
2 Phil S // Nov 22, 2007 at 8:44 am
To oxCC. As a group, I agree they don’t perform well, but you definitely can’t say that about Frank Mersch’s Front Street LSIF fund (in the Energy sector, I can’t recall the exact name).
For me personally, I don’t like to make money off of the destruction of the planet in the oil & gas industry any more than I would want to make money off cigarettes which is in the business of essentially killing people.
Unfortunately in Canada with our ridiculously high taxes, we have to try to take advantage of every bone that the government tosses our way and the LSIF tax credit is one of them. The LSIF structure is basically private equity and I wish that there were an LSIF fund out there that is run by the smartest money on Bay Street in the form of private equity.
3 Canadian Capitalist // Nov 22, 2007 at 9:07 am
The trouble with LSIF is that their high expense structures (MER of 4% is supposed to be low!) negates any excess returns this asset class could provide. Add to that the initial 6% sales charge (hidden because it is paid directly to the advisor) and the only reason these dogs sell is the tax break. I remember reading somewhere that LSIF returns are poor even when compared to private venture capital (I can’t recall the exact details). I don’t plan to invest in these funds ever again because the odds of a decent return is pretty low.
4 FourPillars // Nov 22, 2007 at 11:32 am
Nothing gets me more annoyed than LSIFs. They are a terrible investment.
My initial $15,500 investment is down to about $5500 which even with the tax breaks is just horrible. I can get some of it out next year and the remainder out the following year.
As CC said, the fees are ridiculous - this form of investment was just the government subsidizing some rich guys (who didn’t know any thing about investing) investment funds.
Mike
5 WhereDoesAllMyMoneyGo.com // Nov 22, 2007 at 11:50 am
I just read through the 10 Commandments link, if you haven’t read it yet, do so - it is a phenomenal collection of wisdom and a very enjoyable read.
6 Big Cajun Man // Nov 22, 2007 at 7:46 pm
LSIF’s always confused me, so I just stayed away, and now I am glad I did. If I wanted a tax kick back that badly, I would have given money to the Green Party, or something like that.
c8j
7 CanadianInvestor // Nov 23, 2007 at 9:21 am
Congratulations on the success of your blog, which has become a fixture on the scene, deservedly recognized even by the mainstream financial press. Best of success in future.
I’ve been stung by the LSVCC fiasco too, just waiting till 2008 to cash out. The academic evaluations of LSVCC is about as uncomplimentary as they can get. One by Douglas Cumming and Jeffrey MacIntosh titled Comparative Venture Capital Governance: Private versus Labour Sponsored Venture Capital Funds concludes that LSVCCs should be terminated.
8 Canadian Capitalist // Nov 23, 2007 at 10:20 am
Looks like quite a few of us were singed by LSIFs. It’s bad enough that we subsidize these investments through our tax dollars, it’s worse to put our own money in it as well. The only people consistently making money on these dogs are advisers and fund management. Hopefully, this asset class will start to die as soon as the Ontario tax credits dry up. It deserves to.
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