How investing $5000 only costs you $1150? It sounds too good to be true - but it is. Infact, it's legal and it can be achieved by investing in a Labour Sponsored Investment Fund (LSIF) and the government encourages it!

The LSIF has "Tax sweeteners" that make it very attractive in certain circumstances. Depending on the province, labour-sponsored funds can generate a 15 per cent tax federal credit and a 15 per cent provincial credit. (Ontario added a 5 per cent tax credit in 2000 for which only a few funds, such as Canadian Medical Discoveries, can qualify.) While the amount you can contribute to a labour-sponsored fund is unlimited, the maximum that you can contribute for the tax credit is $5,000 per year. As well, if the fund is held in an RRSP, you also benefit from the normal RRSP deduction.

For Example, let's assume you are in the 47% Tax Bracket. If you invest $5000, you will receive a $750 Provincial Tax Credit as well as a $750 Federal Tax Credit. If you place the $5000 into an RRSP, you will receive $2350 as a refund (remember, you're in the 47 % tax bracket). So, if you do the math, you receive $750 + $750 + $2350 = $3850. Your investment was $5000 and you've received $4000 - this means you are only out of pocket $1150!

These figures are for those provinces that matched the federal governments increase in the limit from $3,500 to $5,000. Some provinces did not increase so the provincial tax credit would be 15% of $3,500. Other provinces may not participate in the tax credit program, so credits are limited to federal credits, if indeed you can buy them in your province.

Generally, LSIFs invest in eligible small and medium-sized Canadian businesses. In general, venture capital companies are start-up or emerging, small capitalization companies, with less that $5 million in assets. The aim of these funds is to develop the Canadian economy by promoting the growth of small businesses and thereby creating jobs in emerging areas such as telecommunications, e-commerce, and biotechnology. LSIFs are similar to Venture Capital funds with the exception that government legislation imposes several constraints and restrictions on the investments and the timing of the investments in order to protect investors and ensure that the government's goals of economic development and job creation are met.

A LSIF is like a mutual fund such that it allows professional money managers to make investment decisions on behalf of its investors. Individuals investing in LSIFs indirectly share in both the profits or losses from these investments through fluctuation in the Net Asset Value per share of the particular fund. By the LSIF investing in a number of different companies, individual investors are able to reduce their overall investment risk.

A LSIF investment portfolio differs from a mutual fund in the fact that, since it provides venture capital, it will include many private companies and thus offers its investors the potential to enjoy a possible higher rate of return as these companies mature and realize value through mergers and public offerings.

In addition, an RRSP investment in a LSIF enables Canadians to increase their RRSP foreign content limit. The limit can be increased by $3 for every $1 invested in an LSIF, up to a maximum in 2001 of 50% of the total RRSP, upon compliance with relevant conditions. Since LSIFs invest in a number of different companies, individual investors are able to reduce their overall investment risk.

In addition, there are potential long-term gains with successful venture companies. Afterall, Microsoft was a start-up company at one point. As well, the LSIF's offer diversification in a portfolio similar to sector investing with mutual funds. Because labour-sponsored funds generally have heavy exposure to private companies, you won't experience the volatility attributed to Nortel Networks Corp., for example. They also tend to hold greater cash reserves, creating more stability in see-saw markets.

Cautions

These funds are suited to patient people who are investing for the long term. If you buy a labour-sponsored fund today and sell it before 2008, you must pay back the tax credits you receive. As well, there may be additional sales charges on redemptions. Labour-sponsored venture capital companies have no long-term track record, so they are more difficult to research. It is a highly speculative investment. There is no guarantee of returns. And, in the case of labour-sponsored investment funds, management expenses are often more expensive.

LSIFs also require that you hold the fund for eight years, or you pay back the grants that you received, not to mention the deferred sales charge that could be as much as 6% if you cash out early. So your DSC trailer fee to the dealer is also almost guaranteed to last for eight years given the hefty penalty for early exit. So, do your homework or speak with a trusted financial advisor before proceeding. To make an informed decision on this product, you really should understand the mandate of the fund; its sponsor (to determine how labour oriented the fund is); the investment experience of the managers in the venture capital field, and whether or not they have the ability and the time to oversee management of their investment picks; and the grant situation in your province.

One fund that has create alot of interest is the Canadian Medical Discoveries Fund ( www.cmdf.com ). The Fund's primary objective is to achieve long-term capital appreciation through investment in eligible Canadian businesses engaged in the health sciences sector, with emphasis on those businesses involved in early stage commercialization of research or product development. The health sciences sector encompasses a broad range of scientific disciplines and industries that relate to or have an impact on health care including, without limitation, life sciences, biotechnology, diagnostics, medical devices, drug discovery and development, health care delivery services and e-health.

It is recognized that biotechnology holds the potential answers to some of the world's most significant unmet medical needs and the industry is developing biotechnology-derived drug products and vaccines directed at such age-related diseases as various cancers, cardiovascular diseases, Alzheimer's and Parkinson's diseases. As a result, significant market opportunities are unfolding in the development of novel therapeutics and diagnostic tests for intervention and monitoring of these diseases. This is leading to exciting investment opportunities in the biotechnology sector. The Fund aims to maximize its technology diversification within the biotechnology industry. While technology stocks fell 60 percent last year, the fund is just down 8 percent and has terrific prospects for the new year.

If you are interested in LSIF's, you should speak with your financial advisor.