What are Labor-Sponsored Venture Capital Corporations - LSVCC

Labor-sponsored venture capital corporations (LSVCCs) are Canadian corporations created by a labor union that deal exclusively with providing venture capital. Unlike other venture capital corporations, LSVCCs are subject to regulations.

BREAKING DOWN Labor-Sponsored Venture Capital Corporations - LSVCC

Labor-sponsored venture capital corporations, or labor-sponsored venture capital corporations, are sponsored by labor unions or other labor organizations. They are a type of mutual fund corporation that invest venture capital in small and mid-sized businesses, and are the largest provider of venture capital. Each province may refer to them by other names based on their own legislation. 

History of Labor-Sponsored Venture Capital Corporation

The first idea of an LSVCC was proposed in the province of Quebec in 1982, which was going through a recession and 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 in some of the small businesses in the province. LSVCCs began to spread throughout the country, and by the 1990s became viable investment vehicles because of the tax breaks and credits attached to them.  

But following the aftermath of the dotcom bubble, returns for many of these investments have been less than impressive. Some of the reasons for these low returns include high risk ventures, inexperienced managers and government intervention. 

Many academics and financial experts have criticized LSVCCs, saying they are an ineffective way of stimulating a healthy venture capital sector.

Types of LSVCCs

There are two types of LSVCCs: federal ones that are subject to the Income Tax Act. As of 2017, the LSVCC tax credit for solely federally registered LSVCCs has been eliminated. This was proposed as part of the Economic Action Plan 2013. 

But there are still LSVCCs that are regulated by several provinces. They are each subject to the rules and regulations of the province in which they are registered. The Ontario government eliminated its credit, but the leading Liberal party proposed in its 2016 budget to reinstate it, with a 15 percent credit to investors. The province expected the credit to cost $300 million over three years. 

Individuals Benefiting From LSVCCs

Canadian investors can also benefit from investing in LSVCCs. Canada’s federal government provides a 15 percent federal tax credit for anyone who acquires shares in these corporations. These are capped at investments of up to $5,000 each year, with a maximum of $750 in tax relief. Individuals can also hold shares of LSVCCs in their registered retirement savings plans (RSPs), which also provide tax relief.  

Several Canadian provinces also provide tax credits; the province of Ontario scrapped its credit, but proposed to reinstate the tax credit again in 2016. 

But LSVCCs are just like any other investment. They 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 it is 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.