Nova Scotia and other eastern provinces have a history of trouble attracting venture capital. Labour-sponsored venture capital corporations, or LSVCCs, offer hope by helping small businesses grow and providing local jobs. Many provinces offer a tax credit to encourage investment in these firms.
Labour-Sponsored Venture Capital Corporations
An LSVCC is an investment firm sponsored by a trade or labour union for the purpose of investing in small- and medium-sized companies that are in need of capital to sustain growth. These corporations usually invest funds by purchasing an equity stake, or ownership share, in companies that are too small to obtain financing from traditional sources but have the potential for large growth. The equity stake gives the fund the ability to appoint fund managers to the boards in these companies. LSVCC investments are not permanent. Their purposes are to fund growth of startups, create and maintain jobs, and provide returns to investors. The funds realize gains by selling or merging the company or issuing an initial public stock offering, or through appreciation of assets. Because these funds invest in companies with little or no history or track records, they may appear as risky investments to some individuals. However, these funds enable small businesses to create and maintain jobs in local economies, so most provinces and territories provide tax credits to encourage individuals to invest in them.
Eligibility and Operation of Nova Scotia LSVCC Tax Credit
The Nova Scotia Labour-Sponsored Venture-Capital tax credit is a nonrefundable credit you may deduct from your taxable income on your provincial income tax return. You are eligible for this credit if you are a resident of Nova Scotia who is over 19 years of age. The only stipulation is you cannot make the investment for the sole purpose of claiming the tax credit. You may claim 20% of your investment in an LSVCC up to a maximum credit of $2,000 per year. You must claim the credit in the year of the investment, or within 60 days; you cannot carry the credit forward. As such, you forfeit any amount that exceeds your taxable income. You must leave the money invested in the corporation for a minimum holding period of eight years, otherwise, the government may require you to pay back the credit. The Canada Revenue Agency website list the forms and instructions for claiming the credit.
History and Future of LSVCC Funds
The first LSVCC originated in 1982 in Québec in response to a severe economic recession and high unemployment at the time. The federal government and several provinces began offering tax credits to investors in Nova Scotia in 1984. When the government increased the federal tax credit to 20% in 1992, many provinces followed suit and funds poured into LSVCCs, causing a drain on federal revenues. The funds began falling out of favour in the mid-1990s amid claims that many investors had lost some or all of their investments, allegations of mismanagement, and poor performance. Critics began demonizing these funds as another failed liberal policy. To reduce LSVCC investment, the federal government reduced the tax credit from 20% to 15%, and lengthened the holding period from five to eight years. The federal tax credit began a phase-out with elimination in 2017. Some provinces, such as Ontario, also eliminated the LSVCC tax credit. Nova Scotia has maintained the tax credit at 20% so the future of these funds remains unclear. Labour-sponsored venture capital corporations are investment firms that purchase equity stakes in small businesses to provide capital for fuelling growth. These companies benefit local communities by creating and maintaining jobs. Many provinces, including Nova Scotia, provide tax credits to encourage investment in these funds, but their future is uncertain due to a history of poor performance and mismanagement.