Government move helps labour fund investors

New rules make it easier to claim rollover tax credits.

The federal finance department recently announced it is proposing what it calls a “minor change” in the rules for redeeming units in labour-sponsored venture capital funds. But if you bought units five years ago, during the 1995 RRSP season, you won’t think it’s so minor. In fact, it could be a windfall for you.

Until 1996, the holding period for labour fund units was five years. After that, they could be redeemed without having to repay the tax credits, although a deferred sales charge still applies in some cases.

This means that shares purchased in 1995 (or earlier) can be cashed in and the proceeds immediately rolled over to purchase new shares in the same labour-sponsored fund or, if you prefer, a different one. This gives rise to a new federal tax credit, as well as to a new provincial credit in some provinces.

However, some investors who bought shares during the first two months of 1995 had a problem. At the time, many of the funds were valued only monthly, so the transaction wasn’t actually completed until March of that year. A strict interpretation of the five-year rule would mean that noollover could take place during this RRSP season (which ends Feb. 29) for the affected funds. That means no tax credit could be claimed for 1999.

The “minor change” fixes this. All labour fund shares redeemed in February (or on March 1) will be deemed to have been cashed in 30 days later for purposes of determining exposure to tax credit recovery. So if you bought units in February 1995, you can roll them over right now and claim a new tax credit on your 1999 return. This applies even if the units are being held inside an RRSP.

However, you can’t roll over old units and invest in new ones as well. The total federal tax credit you can claim is still 15% of the units you acquire in either way, up to an annual investment of $5,000 (in other words, a maximum federal tax credit of $750). Provincial rules are similar.

This strategy may be of special interest to someone who is holding labour fund units in an RRSP but has no new contribution room and no cash available for a new investment outside the plan. By taking advantage of the rollover, you can generate a new federal tax credit without putting up any money. However, regulations governing provincial credits vary so check to see if you can also claim a provincial tax break in this way (Ontario residents are okay).