The federal government is restoring the Labour-Sponsored Venture Capital Corporations (LSVCC) tax credit in an effort to boost the incentive for Canadians to invest in applicable funds, which facilitate access to capital for small and medium-sized businesses.

In the 2016 federal budget, presented in Ottawa on Tuesday, the government revealed plans to reinstate the 15% tax credit for share purchases of certain types of LSVCCs.

An LSVCC is a form of mutual fund corporation, sponsored by an eligible labour body, which is mandated to provide venture capital to small and medium-sized businesses. There are two types of LSVCCs: provincially registered ones, which are subject to the rules set out in their enabling provincial legislation; and federally registered ones, which are subject to the rules set out in the Income Tax Act.

Prior to 2015, individuals acquiring both types of eligible LSVCC shares qualified for a 15% federal tax credit for investments of up to $5,000 each year. Stephen Harper’s previous Conservative government had planned to phase out that tax credit. It was reduced to 10% for the 2015 taxation year and to 5% for the 2016 taxation year and was scheduled to be eliminated for the 2017 and subsequent taxation years.

The Harper government had also introduced rules preventing new federal LSVCCs from getting registered and new provincially registered LSVCCs from being prescribed for the purposes of the federal tax credit.

Budget 2016 proposes to restore the credit to 15% for share purchases of provincially registered LSVCCs for 2016 and subsequent taxation years. The budget also specifies that newly registered provincial LSVCCs will be eligible for prescription for the purposes of the federal credit.

However, federally registered LSVCCs will not be eligible for the new tax credit. Budget documents explain that although significant funding to small and medium-sized businesses has been provided in several provinces through provincial LSVCC programs, the national LSVCC program has been less successful.

As a result, the federal tax credit for federally registered LSVCCs will remain at 5% for the 2016 taxation year and be eliminated for the 2017 and subsequent taxation years. The government will also maintain the prohibition on new federal LSVCC registrations.

Several provinces offer a similar tax credit on LSVCC investments at varying investment limits and tax credit rates. The restoration of the federal credit will sweeten the incentive for investors who can also benefit from those provincial credits, says Jamie Golombek, managing director of tax and estate planning with Toronto-based Canadian Imperial Bank of Commerce’s wealth strategies division.

However, he notes that LSVCC funds are highly risks and are certainly not appropriate for all clients.

“This will be of benefit to some investors who continue to purchase labour-sponsored funds and rely on the provincial credits,” Golombek says, “but for many Canadians, their experience in labour-sponsored funds — aside from the tax credit — has not been positive.”

Ian Russell, president and CEO of the Investment Industry Association of Canada, is not a fan of the government’s initiative.

“All our research shows these funds are ineffective in raising capital for successful small businesses, so that’s a disappointment,” Russell says. “The labour-sponsored venture capital funds were a disaster in the past.

“Other incentives we would have preferred didn’t happen, such as deferring capital gains tax on the sale of small business shares, providing the proceeds are reinvested in another small business, or providing a personal tax credit on the purchase of small business shares in certain industries, such as manufacturing, services or technology.”

The government projects that the tax credit will cost a total of $300 million over the next three years.