The United States has the “Joe Millionaire” reality TV show, but Canada gives its average Joes the possibility of becoming real millionaires. Canadians can invest directly in venture capital funds through government-sponsored programs.
If a worker invests in a venture fund through a Registered Retirement Savings Plan, Canada’s version of an individual retirement account (IRA), the funds are subsidized with tax credits of 15% by the Canadian federal government and an additional 15% by their respective provincial government. That’s a tax break of 30%, a rate that can go up to 35% if Canadians invest in a riskier research-oriented investment fund.
Last year, labor-sponsored venture capital firms raised $1.15 billion out of a total of $2.16 billion raised by Canadian venture capital firms. While private investment in venture capital funds increased by 133% over 2001, labor-backed funds still put up 53% of the money going into venture capital funds in Canada. “It’s a Canadian creature for sure,” says Les Lyall, a senior vice president with Vancouver-based GrowthWorks, an LSIF. “It’s more like a mutual fund.”
Workers and retirees may contribute $3,362 per person per year into a qualified labor-sponsored investment fund. In order to qualify for the tax cuts, investors must keep their money in a labor- or research-backed for eight years. After 10 years, investors are allowed to redeem their investment. In many cases they redeem their assets and immediately reinvest them.
Robin Louis, president of Ventures West Management, says that the labor-backed funds are a hindrance to much-needed private money in the Canadian venture capital industry. “I don’t understand why the Canadian government spends $500 million [a year] to subsidize the Canadian venture industry,” he says. “I’d rather have investors fund venture capital because they’re going to get returns. The thing that makes them attractive to a potential investor is the tax breaks-not the returns.”
Despite doubts in some corners, though, the VC community in Canada is supportive of the labor-backed funds. Joel Liederman, vice president with Primaxis Technology Ventures, says that the labor-backed funds are vital for both the retail investors who put in their money and the venture industry as a whole. “These funds are putting money in from retail investors who otherwise wouldn’t do it,” he says.