Observers of the venture capital industry say investment in Ontario is almost certain to decline if the provincial government follows through on its intention to eliminate its 15% tax credit for investments in labour-sponsored investment funds (LSIFs). The reaction to the province’s announcement has been almost universally negative, although LSIFs have been criticized in the past for mediocre performance and high management fees.

The decision to eliminate the 15% tax credit after the 2005 taxation year follows decisions in 2004 to impose a moratorium on new LSIF registrations, to make several changes to LSIF legislation (never implemented) and to undertake a review of the asset class (R$, May 27/04). Ontario’s 2005 Budget announced that the review would be released last spring.

Despite the review, representatives of the venture capital industry claim they were never consulted prior to the announcement.

Dale Patterson, executive director of the Association of Labour-Sponsored Investment Funds (ALSIF) calls the decision “ill-advised” and warns that “the next generation of entrepreneurial firms will find it very difficult to attract capital”.

In 2004, the ALSIF sponsored a study that showed that LSIFs have added $2.3 billion to the province’s gross domestic product growth and 27,000 jobs.

Reaction by the Canadian Venture Capital Association (CVCA) to Ontario’s announcement was more muted. CVCA president Dr Robin Louis said he was surprised the decision was made without industry consultation. He predicted that LSIF will necessarily preserve their liquidity for follow-on investment and that “participation in the funding of new investments will decline sharply”.

The heads of GrowthWorks Capital Ltd and VenGrowth Private Equity Partners also criticized the decision.

Ontario introduced its LSIF tax credit in 1991 following the federal lead to stimulate LSIF investment through the tax system. The federal government of the day, led by Brian Mulroney, adopted the strategy from the Quebec government, where LSIFs were first introduced during the early 1980s. Quebec’s Le Fonds de solidarité FTQ remains the largest LSIF in Canada and the only LSIF in Quebec with $5.5 billion under management as of November 30/04.

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