Labour Sponsored Investment Funds

This publication is provided as a guide only. It is not intended as a substitute for the Income Tax Act (Ontario) and Regulations/Community Small Business Investment Funds Act.

About this bulletin

On September 30, 2005, the Minister of Finance announced that the Labour Sponsored Investment Funds (LSIF) tax credit would be eliminated at the end of the 2010 tax year. On May 14, 2008 the government announced that the phase-out has been extended by one more year to the end of the 2011 tax year.

Phase-out schedule

The phase-out of the tax credit under the Community Small Business Investment Funds Act (the act), is as follows:

Shareholders who redeem shares prior to the eighth anniversary of their acquisition will continue to be subject to an early redemption penalty.

The following legislative amendments came in to effect for 2005 onward. Sections of the act that have been changed are included in parentheses following each heading.

Qualifying debt obligation (Subsection 12(1))

The definition of qualifying debt obligation has been amended as follows:

• The prohibition against LSIFs preventing an eligible business from incurring any other debts would be removed.
• The term floating charge has been replaced with language that allows LSIFs to take a security interest in one or more of the assets of an investee business, provided that the security agreement does not prevent the borrower from dealing with the collateral in the ordinary course of business prior to default.
• LSIFs are allowed to take a guarantee from any person, not just from another LSIF.
• The requirement that a debt obligation be subordinate to all other debt has been replaced with a requirement that LSIF debt not rank ahead of any other creditor secured against the same asset.

Amendments to clause 18(1)(b) of the act clarifies that if an LSIF guarantees a qualifying debt obligation issued by an eligible business, the guarantee would be treated as an eligible investment with a cost of 25 per cent of the amount of debt
guaranteed.

LSIF investment level requirements (Pacing) (Subsection 17(1))

Prior to 2005, LSIFs were required to invest 70 per cent of the capital that they raised in small and medium enterprises, subject to some adjustments.

For 2005 through 2012, the pacing formula would be based on 60 per cent of the aggregate amount of equity capital received on the issue of Class A shares outstanding at the end of the calendar year that were issued before the 61st day of the calendar year;

• excluding Class A shares that have been outstanding for at least eight years
• excluding Class A shares eligible for redemption within the first 60 days of the following calendar year
• reduced by 20 per cent of the aggregate amount of equity capital received on the issue of Class A shares issued during the period beginning on the 61st day of the previous year and ending on the 60th day of the calendar year.

For 2013 and subsequent years, the pacing formula would be based on 60 per cent of the aggregate amount of equity capital received on the issue of Class A shares outstanding at the end of the calendar year that were issued before the 61st day of
2012:

• excluding Class A shares that have been outstanding for at least eight years
• excluding Class A shares eligible for redemption within the first 60 days of the following calendar year.

For 2005 and subsequent years, the percentage of gains realized on eligible investments added to the pacing formula under letter "D" has been lowered from 70 to 60 per cent.

Dispositions (Subsection 17(3))

Under subsection 17(3), an LSIF can count an investment that it has disposed of against pacing requirements for nine months following the disposition. This deemed eligibility period has been extended from nine months to 24 months for dispositions on or after January 1, 2005.

Listed company limit (Subsection 18.1(5))

The limit on investments in publicly listed companies has been eliminated for the calendar year 2005 and onwards.

Small business requirements (Subsection 18.1(8))

The small business investment requirement has been eliminated for the calendar year 2005 onwards.

Follow-on investments (Section 18)

A follow-on investment in an investee that no longer meets the definition of eligible business only because it is either larger than 500 employees or has more than $50 million in assets would be counted as an eligible investment, provided:

• when the LSIF made its initial investment the investee met the definition of eligible business
• the LSIF continues to hold the initial investment.

Reserves (Subsection 19(2))

The definition of reserves has been expanded to allow LSIFs to hold shares of public securities listed on a Canadian or foreign stock exchange prescribed under the federal Income Tax Act.

Aggregate investments (Subsection 20(2))

The $15 million limit on aggregate investments in an eligible business and any related business has been increased to $20 million.

Material change (Subsection 21(2))

The deemed eligibility period following a material change has been extended to 24 months for material changes on or after January 1, 2005.

Wind-up provisions (Section 27.2)

Wind-up rules now allow an LSIF whose fund managers had determined that continuing in the program was not in the best interest of shareholders to exit the program without penalty to the fund or to shareholders. The wind up rules came into effect August 29, 2005.

An LSIF choosing to exit would be required to notify the minister of its intention to wind up. The notice to the minister would be required to include a reasonable date for the end of the wind-up period (the wind-up date), when the LSIF would surrender its registration. Any public statement of an LSIFs intention to wind up (e.g., in a prospectus, through press release, on a website) will be considered to be notification to the minister.

An LSIF that notifies the minister of its intention to wind up would be subject to the following rules:

• The LSIF would no longer be eligible to issue tax credits.
• Class A shares redeemed as part of the wind up, and occurring within a reasonable number of days before the wind up date, would not be subject to a clawback of the tax credit under section 14.1 of the act.
• While winding up, LSIFs would not be subject to pacing requirements under section 17 of the act. If notification was received:
  • by January 31, 2006, the LSIF would not be subject to pacing requirements for 2004, and subsequent years
  • after January 31, 2006, the LSIF would not be subject to pacing requirements beginning in the year in which notice was received, or the prior year if notice were received in the first 31 days of the year.
• While winding up, the LSIF may not inform the minister of material changes to its investments under section 21 of the act.
• While winding up, subsection 27(4.1) of the act would not apply, and the LSIF would be allowed to return stated capital to its shareholders.
• On the wind up date, the LSIF would surrender its registration without penalty under subsection 27(2.1) of the act, assuming all Class A shares had been redeemed by that time.

An LSIF that notifies the minister after January 31, 2007 of its intention to wind up would be allowed to use the wind-up rules only if it had raised less than 20 per cent of its Class A equity, excluding Class A shares that have been outstanding for at least eight years, in the 24 months prior to notification. Class A shares issued pursuant to an asset purchase arrangement under section 27.1 of the act in the 24 months prior to notification would not be included in this calculation.

In addition, while winding-up, LSIFs may sell investments to continuing LSIFs. Investments bought by continuing LSIFs would be deemed to be eligible investments for the purchaser under section 18 of the act. The fair market value at the time of purchase would be considered the cost of the investment for the purchaser for the purpose of pacing requirements.

More information

To obtain the most current version of this publication, or additional information, visit our website at ontario.ca/revenue and enter 551 in the find page field at the bottom of the webpage or contact the Ministry of Revenue at:

• 1 866 ONT-TAXS (1 866 668-8297)
• 1 800 263-7776 teletypewriter (TTY)