What are the penalties involved in selling labour funds early?

Gena Katz, a chartered accountant and principal with Ernst and Young, has the answer.

Gena Katz 24 February, 2003 | 2:00PM

Dear Expert:

I invested a total of $10,000 in two labour-sponsored funds to take advantage of the tax rebates and the RRSP foreign-ownership-limit increase. Unfortunately, both of these funds did rather badly. They are now worth about $6,400 combined. I would like to get out of them; could you explain the penalties involved? I've had one fund for four years and the other for two. Do I have to pay all the tax credits back? Or would it be possible to switch these funds to another labour-sponsored fund without incurring a penalty?

Expert Answer:

The purchase of labour-sponsored venture capital funds (LSVCs) entitles the investor to a federal tax credit of 15% of the net cost of the investment, to a maximum of $750, relating to a $5,000 investment (credits apply equally for purchases of LSVC funds either in RRSP or non-registered accounts). In addition, a number of provinces provide matching credits. A special penalty tax is payable if LSVC shares are redeemed, acquired or cancelled less than eight years after they are issued (for shares acquired after March 5, 1996). The penalty basically equals the tax credit that was available to the individual when the share was acquired; in fact, the fund is required to withhold the full amount of the credit from the redemption proceeds. Assuming you received both federal and provincial credits for your LSVC investments, the full $3,000 credit will be recaptured on redemption.

There are only a few exceptions to the clawback requirement and these include cases of illness and death, but not switching to another LSVC investment.

To find out how much an RRSP contribution may save you, try Morningstar's RRSP Calculator.

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Gena Katz

Gena Katz