Labour-sponsored investment funds explained

The federal and provincial governments introduced LSIFs in the 1980s to promote economic growth by encouraging Canadians to investInvest To use money for the purpose of making more money by making an investment. Often involves risk.+ read full definition in small- to medium-sized companies.

LSIFs invest in companies developing new products or markets – these ventures can be risky. Ontario has eliminated its LSIF tax creditTax credit The amount you can deduct from your income when you file your taxes. This lowers the tax that you owe.+ read full definition for years after 2011 however you can still buy an LSIF. Learn more about Ontario’s LSIF program.

In British Columbia, investors in LSIFs can receive a combined federal and provincial taxTax A fee the government charges on income, property, and sales. The money goes to finance government programs and other costs.+ read full definition credit of 30%. On a $5,000 investmentInvestment An item of value you buy to get income or to grow in value.+ read full definition, the tax credit is $1,500.

Where to buy LSIFs

You can buy an LSIF from an investment firm or directly from the mutual fund companyMutual fund company An investment company that pools money from investors and invests it in a mix of investments, such as stocks, bonds, and money market investments. Most mutual fund companies offer a choice of more than one fund.+ read full definition.

4 main risks

  1. Investments are speculative – LSIFs invest in riskier ventures. Many of these companies are small and unproven, and are in the early stages of developing new products or markets. There’s a good chance they could lose money or go out of business.
  2. Your money is locked in for 8 years – If you sell early, you’ll lose any tax credits you claimed. You may also have to pay an early redemption feeRedemption fee A fee that some mutual funds charge when you sell or redeem units. Unlike a deferred sales load, you pay this fee to the fund (not to a broker). It covers the costs of redeeming your units.+ read full definition.
  3. Funds can suspend redemptions without notice – You may not be able to get your money out when you need it.
  4. Performance is difficult to assess – The investments held by LSIFs may be difficult to value, and their valuation may involve significant judgment. Because of this, an LSIF’s performance may be difficult to assess objectively. Some of the fees you pay for an LSIF are based on this performance.

4 costs of LSIFs

  1. Management fees – Like a mutual fundMutual fund An investment that pools money from many people and invests it in a mix of investments such as stocks and bonds. A professional manager chooses investments that match the fund’s goals for risk and return. You can redeem your fund units at any time.+ read full definition, your costs include fees for managing and operating the fund. This is called the management expense ratio (or MER). Most LSIFs charge a higher MER than mutual funds because they have higher research costs.
  2. Performance fees – These fees reward LSIF managers for good performance. Different funds use different formulas. Some LSIFs pay a performance fee if the fund’s yearly return is higher than 6%, before costs. Others calculate the return after costs.
  3. Sales commissionsCommissions What you pay to a broker or agent for their services. Often called a “sales commission”. For example, you pay a fee to someone who buys or sell stocks or real estate for you.+ read full definition – These fees go to the salespeople who sell the LSIF to investors.
  4. Early redemption fee – This fee could apply if you sell early.

Take action

Before you invest, read the prospectusProspectus A legal document that sets out the full, true and plain facts you need to know about a security. Contains information about the company or mutual fund selling the security, its management, products or services, plans and business risks.+ read full definition to understand the risks and costs of investing in an LSIF.

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