Prominent among the incentives of value to labour-sponsored funds are federal and provincial tax credits. Available to individual Canadians to offset the cost of share purchases in the funds, each credit is worth 20 percent.
Access to both credits is almost universal across the country. Full availability depends, of course, on the promulgation of tax legislation in all provinces. Presently, Alberta and Newfoundland have not enacted such legislation, though residents in these jurisdictions can still subscribe to a national labour-sponsored fund using the federal credit. Where funds are provincially-constituted, complete access is assured. This gives a 40 percent reduction in personal outlays for the net cost of share acquisitions, or savings worth $2,000 on a $5,000 investment, for example.
Both the federal and provincial credits are not automatically available, however, to investors in a national fund. In this instance, provincial authorities offer a matching credit only under conditions that are amendable to them. Working Ventures, for example, must negotiate with provincial governments to make credits available if it is to enter a given jurisdiction to both raise capital and invest.
All governments impose limits on tax subsidization and, by extension, on overall buying, though these may vary in size and nature, by jurisdiction. To illustrate, the federal credit functions with a $1,000 maximum limit per individual in a given tax year. In British Columbia, the total cost of the fund program to the provincial treasury is controlled, in part, by a lifetime limit on each person's ability to trigger the credit when acquiring shares (currently, this is $10,000 on cumulative investments totalling $50,000).
Labour-sponsored funds also benefit from the federal tax deduction for transferring or otherwise keeping an individual's shares in RRSPs. For the $5,000 investment - made by a person with a $35,000 income, taxable at recent rates - this results in a further $2,000 plus in tax savings (and, as with all deductions, total savings rise with income). Shares also qualify as contributions to registered retirement income funds (RRIFs).
Availability of the federal deduction explains why the most intensive period for capital accumulation among labour-sponsored funds is the RRSP season ending in March of every year. Moreover, the generosity of the tax savings package to many thousands of participating Canadian taxpayers explains the frequent doubling and tripling of initial fund assets - combined with well-organized and well-executed sales campaigns.
Given that the bulk of this year's fund capital has already been raised, and stands at a minimum of $700 million, total federal tax revenues foregone (due to the credit) doubtless is in excess of $140 million in 1995. A more precise tax calculation would also have to estimate the cost of fund-inspired deposits into RRSPs (evidence suggests that not all money placed in a fund would otherwise go into an RRSP). According to the federal Standing Committee on Industry, this renders labour-sponsored funds the "largest single instrument of federal support for venture capital formation in Canada."Endnote 6