Canada’s venture industry warns that the federal government’s recent decision to scrap the federal tax credit for labour-sponsored venture capital corporations (LSVCCs) could undermine its recent efforts to rejuvenate venture investment.

In last week’s budget, the federal government said it plans to eliminate the 15% federal tax credit for the acquisition of LSVCC shares by 2017. Its plan for phasing out the credit would see it remain at 15% for tax years that end before 2015, then reduced to 10% for the 2015 tax year, 5% for the 2016 tax year, and eliminated for good in 2017. It also proposes to end new LSVCC registrations, as of budget day.

Budget 2013: New measures to help boost venture capital

In the budget, the government indicated that it is eliminating the credit because it has been criticized as an inefficient way to stimulate venture investment. Today, Canada’s Venture Capital and Private Equity Association (CVCA) expressed its disappointment with the proposal, and said “… there is broad concern this proposed change will impede the goal of long-term sustainability for the venture capital industry.”

“We are puzzled at the federal government’s actions on tax credits for LSVCCs,” said Peter van der Velden, president of the CVCA and managing general partner of Lumira Capital; noting that the federal government has recently consulted with the industry over its planned $400 million injection into venture funds, but that this move to eliminate the federal tax credit came as a surprise to the industry.

“Unfortunately the federal government elected not to consult with the CVCA or its members on the specific question of the current role and impact of LSVCCs in the market and it is the CVCA’s view that this budget measure poses a severe risk of constricting the supply of venture capital,” said van der Velden.

The CVCA indicates that it has two specific concerns. Namely, that eliminating the credit could put regional investment at risk, as LSVCCs are particularly active outside the main centres of economic activity. And, second, that these vehicles “play a structural role” in the venture industry, and are frequently co-investors. “By eliminating the federal tax credit, a critical piece of infrastructure may be stripped from the entrepreneurial and venture capital eco-system,” it says, noting that this seems contrary to federal efforts to catalyze venture investment.

It intends to examine the likely impact of this measure on the venture industry and the economy overall, it says; and, it notes that members of the CVCA want to engage the federal government, and the department of Finance, in a formal consultation on this issue.