Ministry of Finance

Ontario Plans To End Tax Credit For Labour Sponsored Investment Funds

Incentive To Investors No Longer Needed In Healthy Venture Capital Market

    TORONTO, Aug. 29 — The Ontario government announced today that it
plans to eliminate its 15 per cent tax credit for investors in Labour
Sponsored Investment Funds (LSIFs) no earlier than the end of the 2005
taxation year.
    "The LSIF tax credit was introduced when there was a need to kick-start
the venture capital sector in Ontario," Finance Minister Greg Sorbara said.
"Ontario's venture capital market is much healthier now, and we believe that
this incentive is no longer the best fit in today's economic and fiscal
climate."
    A healthy venture capital market is important to promoting innovation and
research, a priority of the McGuinty government. Ontario's venture capital
market includes more than 200 private sector venture capital funds, and close
to 200 U.S. funds have invested in Ontario companies over the past six years.

    The McGuinty government's commitment to promoting innovation and
research, and supporting an environment that encourages business investment
and job creation, includes:
 — A new Ministry of Research and Innovation, led by the Premier
 — A new Research Council of Ontario to co-ordinate public research and
       commercialization opportunities, and promote Ontario as a research
       centre
 — A $27 million Ontario Research Commercialization Program to help
       public research institutions attract early investment
 — A $36 million Ontario Commercialization Investment Fund to help
       encourage investment in new technology companies
 — $10 million to support the establishment of the McMaster Innovation
       Park in Hamilton
 — $6.5 million over three years for the new Medical and Related Sciences
       (MaRS) Discovery District to help market new Ontario technologies to
       the world.

    The provincial government announced in its first Budget an on-going
examination of tax expenditures to ensure that they continue to provide the
maximum benefits for the people of Ontario. The province will introduce
legislation that would, if approved, eliminate the LSIF tax credit no earlier
than the end of the 2005 tax year. The federal government continues to offer
its own tax credit for labour-sponsored venture capital corporations.
    "Investors continue to have the option to invest in labour sponsored
investment funds," Sorbara said. "Our proposal would simply end the added
Ontario incentive. To assist with an orderly exit, we will consult with the
LSIF industry over the next three weeks on rules that will help fund managers
manage their portfolios, while ensuring that government spending is directed
to priority areas."

    Disponible en français

                For more information visit www.fin.gov.on.ca



    Backgrounder
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           VENTURE CAPITAL AND A NEW GENERATION OF ECONOMIC GROWTH

    The decision to end the province's tax credits for labour sponsored
investment funds reflects the McGuinty government's commitment to direct
resources where they can best encourage a new generation of economic growth.
    In 1988, the federal government introduced the Labour Sponsored Venture
Capital Corporation tax incentive program to help kick-start venture capital
investment.
    In 1991, at a time of recession and high unemployment, Ontario joined the
federal program with its Labour Sponsored Investment Fund (LSIF) program.
Since that time, the province has invested more than $600 million in this
program. Individual investors who buy shares in an LSIF receive a provincial
tax credit of up to 20 per cent on a maximum $5,000 investment. The investment
must be held for eight years to avoid repayment of the tax credit.
    LSIFs are venture capital corporations, designed to provide alternative
sources of capital to small and medium-sized Ontario businesses. Today there
are 46 registered labour sponsored investment funds and almost $3 billion in
capital under management in Ontario.
    The 2004 Ontario Budget announced a moratorium on new LSIF registrations
as the government examined whether Ontario's participation in this program was
still appropriate. The government has determined that the LSIF tax credit has
achieved some success in creating a pool of venture capital in the province.
With the growing maturity of Ontario's venture capital market, and the new
participants it is now attracting, the McGuinty government's focus is shifting
to specific challenges, such as research commercialization and ensuring that
resources are directed to priority areas.
    Today there are more than 200 private sector venture capital funds and
close to 200 U.S. funds investing in Ontario companies over the past six
years, according to data from Thomson Macdonald, a respected independent
source of information on venture capital.
    The government is committed to a new generation of economic growth and a
modern, prosperous economy. Research and innovation is a key part of this
approach. Initiatives that support this commitment include:
 — A new Ministry of Research and Innovation, led by the Premier
 — A new Research Council of Ontario to co-ordinate public research and
       commercialization opportunities, and promote Ontario as a research
       centre
 — A $27 million Ontario Research Commercialization Program to help
       public research institutions attract early investment
 — A $36 million Ontario Commercialization Investment Fund to help
       leverage pools of seed capital to encourage new technology companies
 — $10 million to support the establishment of the McMaster Innovation
       Park in Hamilton
 — $6.5 million over three years for the new Medical and Related Sciences
       (MaRS) Discovery District to help market new Ontario technologies to
       the world.

    As part of an orderly end to the provincial tax credit, the government
will propose amendments to the program that would give LSIFs more flexibility
in the management of their portfolios as they plan their investment strategies
for 2005 and later years. Under proposed changes to investment requirements,
the Ontario program would parallel the federal program by lowering the
requirement to invest in eligible businesses from 70 per cent to 60 per cent
of capital raised and remove investment requirements unique to Ontario's
program, such as restrictions on investments in public companies. In addition,
the government will work with the LSIF industry and the federal government to
assist with the transition from a provincial/federal program to a federal-only
tax credit.

For further information: Michael Arbour, Minister's Office,
(416) 325-4138; Manuel Alas-Sevillano, Ministry of Finance, (416) 212-2155