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Canada Phases Out Venture Capital Tax Credit

by Mike Godfrey, Tax-News.com, Washington

02 December 2013


The Canadian Government, led by Finance Minister Jim Flaherty, is consulting on a package of draft legislative proposals for the orderly phase-out of the federal Labor-Sponsored Venture Capital Corporations tax credit.

Introduced in the 1980s, LSVCCs are a type of mutual fund corporation, sponsored by labor unions or other labor organizations, that make venture capital investments in small and medium-sized businesses. Individuals acquiring LSVCC shares of up to CAD5,000 (USD4,273) a year can receive a 15 percent federal tax credit. Federally registered LSVCCs are subject to the rules set out in the Income Tax Act, while provincially registered funds are subject to the province's own legislation and are prescribed for the purposes of the Income Tax Act. This prescription allows individuals investing in provincially registered LSVCCs to claim the federal tax credit.

Finance Minister Jim Flaherty announced in his 2013 Budget that the tax credit will be phased out by 2017. Public consultations on the tax rules governing LSVCCs were launched in May, with the Finance Department seeking public input on potential technical changes to the rules related to investment requirements, wind-ups, and redemptions.

The transitional rules unveiled this week build on the feedback received during the consultations. Investment requirements and penalties will be axed in the case of federally registered LSVCCs that give notice of their intent to exit the program. Subject to Flaherty's approval, federally registered LSVCCs would be able to issue new classes of shares. These would not be subject to the investment rules applicable to LSVCCs, but would not attract the federal tax credit.

The Department will accommodate any necessary technical, coordinating phase-out amendments to provincial legislation.

The consultation will close on January 27, 2014. The Government will then introduce legislation at an early opportunity, taking into account the comments received.

TAGS: individuals | Finance | tax | investment | business | tax incentives | tax credits | ministry of finance | legislation | venture capital | tax planning | tax rates | tax reform | penalties | Invest

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