Labor-Sponsored Venture Capital Corporation (LSVCC)

What Is a Labor-Sponsored Venture Capital Corporation (LSVCC)?

A labor-sponsored venture capital corporation (LSVCC) refers to a corporation created by a Canadian labor union that exclusively provides venture capital to Canadian companies. Investors can purchase units in these funds just as they would mutual fund shares.

LSVCCs are among the largest providers of venture capital and are subject to regulations by federal, provincial, and territorial governments.

How Labor-Sponsored Venture Capital Corporations (LSVCCs) Work

Labor-sponsored venture capital corporations (LSVCCs) are sponsored by labor unions or other labor organizations. The idea of an LSVCC was first proposed in 1982 in Quebec, which was going through a recession at the time. The province required capital in small and mid-sized businesses, many of which were going bankrupt.

The Quebec Federation Labour suggested starting the Solidarity Fund to attract venture capital so it could be invested in some of the province's small businesses. LSVCCs spread throughout the country, becoming viable investment vehicles by the 1990s, primarily because of the tax breaks and tax credits investors received from the government.

Sponsors for these corporations must be labor unions, just as the name implies. LSVCCs are similar to mutual fund companies, meaning they collect money from multiple investors. Pooled together, this capital is then invested in small and mid-sized Canadian businesses, especially those that are deemed to be high-risk and high-growth. As noted above, these entities are among the largest venture capital investors in the country.

LSVCCs were created to help boost growth and stimulate the Canadian economy by investing in startups and other Canadian businesses — most of which are not yet public companies. They are among the largest providers of venture capital in the country. LSVCCs are also called labor-sponsored investment funds, although different provinces and territories may refer to them by other names based on their own legislation.

LSVCC Risks

LSVCCs come with their own risks and rewards and are not for every investor. One thing to consider is the holding period, which for any of these funds is eight years. If sold before then, the investor must pay taxes and/or penalties.

Similarly, anyone interested in buying shares in an LSVCC must consider their risk tolerance along with their overall investment goals, the same as they would when purchasing company stock or mutual funds. An investor must also weigh the tax benefits versus the overall rate of return.

Some academics and financial experts have criticized LSVCCs, saying they are an ineffective way of stimulating a healthy venture capital sector. And returns for many of these investments have been less than impressive following the dot-com bubble. Some of the reasons for these low returns include high-risk ventures, inexperienced managers, and government intervention.

Special Considerations

There are two types of LSVCCs — federally-regulated funds and those that are regulated by individual provinces or territories. The latter are each subject to the rules and regulations of the jurisdiction in which they are registered. That's because of the tax benefits and credits provided to investors. But there have been changes to the tax credit program involving these investments.

Since the 2017 tax year, investors no longer receive credit for investments in LSVCC that are federally registered. For tax years before this period, investors received a 5% tax credit for shares purchased in federal LSVCCs. Investors might also receive a tax credit of up to 15% for certain provincially registered LSVCCs on their federal income tax returns.

These credits were capped at investments of up to $5,000 each year, with a maximum of $750 in tax relief. Individuals were also able to hold shares of LSVCCs in their registered retirement savings plans (RRSPs), which also provide tax relief. Several Canadian provinces and territories also provide their own tax credits. Ontario, though, scrapped its credit for the 2012 tax year and beyond.

Canadian investors can no longer receive tax credits for federally-registered LSVCCs for the 2017 or future tax years.