Labour-sponsored venture capital funds

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DanH
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Post by DanH »

BruceCohen wrote:
smelly wrote:Who can tell the class how/when you generate a capital gain or loss on the redemption of a LSIF? This is a trick question.
If you sell at a loss, the capital loss for tax purposes is reduced by the amount of tax credits you received. I don't know any trick concerning triggering a capital gain.
You figured out the hard part of the answer Bruce - and it sounds like you know how gains are taxed. I realize this is almost like the needle and haystack dilemma, but the answer is found on this page.
BruceCohen wrote:....mentioning capital gain and LSIF in the same sentence seems to be an oxymoron. :roll:
Now you sound like Jon ;-)
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smelly
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Post by smelly »

I was going to post this under Financial Porn but decided this was a better fit. A certain Personal Financial journalist's column today is a dump job on a favourite media chew toy - Labour Sponsored Funds. The only thing he got right was the challenges the fund managers face trying to get these things to generate a positive return on investor's gross investment. But as usual, he ignores the effect of the tax credits when it comes his performance chart.

But his biggest boo-boo, and most glaring example of questionable journalistic practices is his description of dumping some of his own holdings in this asset class. He says he met "a few" execs at a conference and one had the "amusing candour" of saying he "believed his own B.S." about the merits of his fund. Well, we'll never know if this was true or which fund he was talking about since he leaves out this little tidbit. But he makes some comments about tax loss that need to be cleared up. Something most investors, including the column's author, probably don't know is how CRA evaluates capital gains/losses with LSIFs. For a redemption to result in a capital gain, the proceeds must be more than the gross purchase price. Sounds simple and logical, right? You buy $5K and sell for $6K you score a $1K capital gain (and to Bruce and others, yes here have been plenty LSIFs sold at a gain :P ). BUT, in order to generate a capital loss, the proceeds must be less than the net cost - the gross, reduced by the tax credits. So, you buy for $5K and you sell for $3750 but since it cost you $3.5K after tax, the tax Nazi says “NO CAPITAL LOSS FOR YOU, NEXT”, because you sold it for more than your net cost. But no capital gain either because you are in that funny window between your gross cost and your net cost. The author mentions TRIAX, which has had such abysmal performance that it may have met these criteria but none of the others that I'm familiar with have dropped in value enough to be considered a capital loss. Soooo, our intrepid Personal Finance journalist may or may not have a capital loss. Maybe I should be a good citizen and drop a dime to CRA and suggest they ask for backup on his '05 return.


Anyway, there are loads of other mistakes and examples of mis-information in this article but caveat on the tax effect was the one I wanted to pass on. I assume he trolls here or one of his pups will pass this on to him. I think I'll pass on holding my breath waiting for him to tell his readers about this. It's probably too late for a whole bunch of people who already followed his advice this morning.
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yielder
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Post by yielder »

smelly wrote:A certain Personal Financial journalist's column today
Aw come on. Don't play coy. I'm assuming this is the journalist and the column. Unfortunately, it's pay for view so I'll take your factual critique at face value. Even it wasn't pay for view, I still couldn't comment on the factual aspect since I'm not qualified to do so.

Nothwithstanding, ISTM that you greatly undermine the credibility of your critique by wrapping it in a personal dump on the journalist. Why not take the high road and stick to the facts? Or is your beef a personal one and you'd prefer to have a flame war break out here. Jeez, we bend over backward to give you as free a forum as we can and you piss on it in response. Some of us have moved on from the old pissing wars but you persist.

Am I angry? You bet. Why? Because I know that you could make a great contribution here (I've seen you do it) but you seem content to dump. Well it wears thin. Maybe we should just say fuck it and pull the plug on your access. Sigh.
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Post by ModeratorZ »

Smelly, you are getting dangerously close to violating the forum's Etiquette and Principles of Moderation

Yielder, you are getting dangerously close to antagonizing Smelly.

I'd appreciate it if you would both stop it.
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Post by adrian2 »

smelly wrote:But his biggest boo-boo, and most glaring example of questionable journalistic practices is his description of dumping some of his own holdings in this asset class. He says he met "a few" execs at a conference and one had the "amusing candour" of saying he "believed his own B.S." about the merits of his fund. Well, we'll never know if this was true or which fund he was talking about since he leaves out this little tidbit. But he makes some comments about tax loss that need to be cleared up. Something most investors, including the column's author, probably don't know is how CRA evaluates capital gains/losses with LSIFs. For a redemption to result in a capital gain, the proceeds must be more than the gross purchase price. Sounds simple and logical, right? You buy $5K and sell for $6K you score a $1K capital gain (and to Bruce and others, yes here have been plenty LSIFs sold at a gain :P ). BUT, in order to generate a capital loss, the proceeds must be less than the net cost - the gross, reduced by the tax credits. So, you buy for $5K and you sell for $3750 but since it cost you $3.5K after tax, the tax Nazi says “NO CAPITAL LOSS FOR YOU, NEXT”, because you sold it for more than your net cost. But no capital gain either because you are in that funny window between your gross cost and your net cost. The author mentions TRIAX, which has had such abysmal performance that it may have met these criteria but none of the others that I'm familiar with have dropped in value enough to be considered a capital loss. Soooo, our intrepid Personal Finance journalist may or may not have a capital loss. Maybe I should be a good citizen and drop a dime to CRA and suggest they ask for backup on his '05 return.
I think you should read the article more carefully before reaching conclusions:
Jon Chevreau wrote:The ones I opted to liquidate were sold even though the eight-year hold period had not expired. That meant, in the case of a typical $5,000 purchase, repaying $1,500 worth of federal and provincial tax credits.

In each case, it also meant taking a capital loss. The only saving grace was -- as I had preached in more than one column -- they were part of my "non-registered" portfolio so I could at least offset these losses against realized gains in other winning investments.
Your comments and really not applicable in his case: he repaid the tax credits, so the normal rules for capital losses apply. Strike one for you, smelly.
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Post by smelly »

I'll restrict my comments to the facts of the matter, OK Mike?
adrian2 wrote:I think you should read the article more carefully before reaching conclusions:
I'm not sure what you mean adrian2. Yes, he paid back the tax credits - it's not an option since the fundco will withhold the credits automatically - but it doesn't change the fact that unless his net proceeds were less than his net after tax credit cost, he doesn't have a capital loss. My intention here is to raise that flag with anyone contemplating the manouver lest they run afoul of CRA.
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Post by yielder »

smelly wrote:I'll restrict my comments to the facts of the matter, OK Mike?
Great. I'm here to learn not get sidetracked into pissing matches. And I'm not keen to have a Moderator chewing me out. It's been my experience that they cut little slack and have a poor sense of humour. :lol: Thanks and my apologies for getting testy.
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Post by adrian2 »

smelly wrote:I'm not sure what you mean adrian2. Yes, he paid back the tax credits - it's not an option since the fundco will withhold the credits automatically - but it doesn't change the fact that unless his net proceeds were less than his net after tax credit cost, he doesn't have a capital loss. My intention here is to raise that flag with anyone contemplating the manouver lest they run afoul of CRA.
Common sense says that the rule you've mentioned above (no capital loss if proceeds of disposition are less than cost basis but greater than cost basis minus tax credits) applies only if tax credits are not repaid.

In your words, "unless his net proceeds were less than his net after tax credit cost, he doesn't have a capital loss" - his net after tax credit cost basis is $5,000 - $1,500 + $1,500 = $5,000
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Post by DanH »

adrian2 wrote:In your words, "unless his net proceeds were less than his net after tax credit cost, he doesn't have a capital loss" - his net after tax credit cost basis is $5,000 - $1,500 + $1,500 = $5,000
adrian, technically the tax credit repayment would reduce proceeds, not increase cost, such as...

Net proceeds = market value x ( 1 - deferred sales charge %) - tax credit clawback in dollars

I can estimate the figures as...

Net proceeds = $3,000 x ( 1 - 0.015) - $1,500 = $1,455

So, it looks like a capital loss situation regardless.
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Post by adrian2 »

DanH wrote:adrian, technically the tax credit repayment would reduce proceeds, not increase cost
Of course, you're right. In any case, they wash out in the final calculation of loss or gain.
DanH wrote:So, it looks like a capital loss situation regardless.
Which is the bottom line. Jon was right, smelly was wrong.
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smelly
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Post by smelly »

I’m not 100% sure you’re getting it adrian2. Maybe I’m not explaining it properly. Here are two scenarios:

Joe invests $5000 in a LSIF in 2003. He receives a $1500 tax credit so his net cost is $3500. Seven years and eleven months later, the mkt value of his original investment has dropped to $3600. Joe’s bummed out so he redeems his units and receives the net proceeds of $2100 – the $3600 mkt value minus the clawback of the $1500 he received on his tax refund back in 2003. But this does not create a capital loss since his ACB is $3500 – the original $5000 purchase price, minus the $1500 tax credit – which is less than his gross proceeds of $3600. The good news is that it’s not a $100 capital gain either since the proceeds would have to be greater than his gross cost of $5000 to be considered a capital gain.

Bill invested $5000 too but his LSIF was a real dog. Seven years and eleven months later it’s mkt value is $2000. If he sells at that price, he will have a capital loss of $1500 because his gross proceeds of $2000 will be $1500 less than his net cost.

Or maybe I’m not getting your point.

BTW, if the mkt value were less than the clawback (TRIAX), the client would be required to pay to redeem. How’s that for a kick in the nuts?
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Post by adrian2 »

smelly wrote:I’m not 100% sure you’re getting it adrian2.
Ditto.
smelly wrote:Joe invests $5000 in a LSIF in 2003. He receives a $1500 tax credit so his net cost is $3500. Seven years and eleven months later, the mkt value of his original investment has dropped to $3600. Joe’s bummed out so he redeems his units and receives the net proceeds of $2100 – the $3600 mkt value minus the clawback of the $1500 he received on his tax refund back in 2003. But this does not create a capital loss since his ACB is $3500 – the original $5000 purchase price, minus the $1500 tax credit – which is less than his gross proceeds of $3600. The good news is that it’s not a $100 capital gain either since the proceeds would have to be greater than his gross cost of $5000 to be considered a capital gain.
Wrong. It is a capital loss - you should compare the ACB of $3,500 with the net proceeds of disposition of $2,100 (which, as Dan pointed out, should subtract any DSC penalty as well).
Joe has a $1,400 capital loss.
smelly wrote:Bill invested $5000 too but his LSIF was a real dog. Seven years and eleven months later it’s mkt value is $2000. If he sells at that price, he will have a capital loss of $1500 because his gross proceeds of $2000 will be $1500 less than his net cost.
If Bill has to repay the tax credits and nets $500 cash-in-hand after the sale, Bill has a $3,000 capital loss (= $500 proceeds of disposition after tax credits clawback - $3,500 ACB after tax credits).

Another example for you which will fit your warning, but is not applicable in Jon's case:

Smeagol invests $5000 in a LSIF in 2003. He receives a $1500 tax credit so his net cost is $3500. Eight years later, the mkt value of his original investment has dropped to $3600. Smeagol’s bummed out so he redeems his units and receives the net proceeds of $3600. But this does not create a capital loss since his ACB is $3500 – the original $5000 purchase price, minus the $1500 tax credit – which is less than his proceeds of $3600. The good news is that it’s not a $100 capital gain either since the proceeds would have to be greater than his gross cost of $5000 to be considered a capital gain.
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Post by smelly »

Whoa. Is my face red. I am wrong about comparing net cost with gross proceeds. It's net and net. I got a little carried away. Your Smeagol example finally clued me in to my error. Sorry adrian2. I've obviously hit my end of the first quarter brain sprain. Maybe I better take some time off before I cause some serious damage. :oops:

But as I said originally,
- but it doesn't change the fact that unless his net proceeds were less than his net after tax credit cost, he doesn't have a capital loss. My intention here is to raise that flag with anyone contemplating the manouver lest they run afoul of CRA.
I should have left it at that because what we don't know from the article is if the unnamed journalist or any others who decided to pull the plug know that their ACB is the net cost and not the gross cost. It makes a significant difference in what the capital loss actually is. We wouldn't want anyone calculating their loss as the difference between their gross cost and their net proceeds, right?
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Post by Dennis »

I think you owe Jon an apology as well!
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Post by smelly »

Dennis wrote:I think you owe Jon an apology as well!
Can't imagine why I would do that. But I do believe in Karma so help me out. So how did I dis this Jon person you speak of?
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Post by ModeratorZ »

smelly wrote:
Dennis wrote:I think you owe Jon an apology as well!
Can't imagine why I would do that. But I do believe in Karma so help me out. So how did I dis this Jon person you speak of?
Stop being an asshole.

In this post, you said:
I was going to post this under Financial Porn...

The only thing he got right was the challenges...

as usual, he ignores the effect of the tax credits...

his biggest boo-boo, and most glaring example of questionable journalistic practices...

Maybe I should be a good citizen and drop a dime to CRA...

there are loads of other mistakes and examples of mis-information in this article...
An apology is called for. Do it.
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Post by smelly »

ModeratorZ wrote: Stop being an asshole.

In this post, you said:
I was going to post this under Financial Porn...

The only thing he got right was the challenges...

as usual, he ignores the effect of the tax credits...

his biggest boo-boo, and most glaring example of questionable journalistic practices...

Maybe I should be a good citizen and drop a dime to CRA...

there are loads of other mistakes and examples of mis-information in this article...
An apology is called for. Do it.

WTF?!

Norbert can call stuff he disagrees with financial porn but I can't? Bylo and others can ridicule and express opinions in a condescending, sarcastic manner but I can't? What a colossal double standard. In that post I said nothing that was slanderous or even incorrect. I expressed an opinion in a manner no worse than what you guys say about my side of the business and I’m being an asshole? If you guys are that afraid of dissenting opinions, are that easily offended and are that afraid of offending your hero then go for it. Ban me. Stifle the opposition if you’re that afraid. Carry on with your little circle jerk, your mutual admiration society.

An apology to him? Not in a million years.
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Post by Norbert Schlenker »

smelly wrote:
ModeratorZ wrote: Stop being an asshole.

In this post, you said:
I was going to post this under Financial Porn...

The only thing he got right was the challenges...

as usual, he ignores the effect of the tax credits...

his biggest boo-boo, and most glaring example of questionable journalistic practices...

Maybe I should be a good citizen and drop a dime to CRA...

there are loads of other mistakes and examples of mis-information in this article...
An apology is called for. Do it.
WTF?!

Norbert can call stuff he disagrees with financial porn but I can't?
I don't think that's what the moderator took issue with, smelly.
In that post I said nothing that was slanderous or even incorrect.
I've been out all day and just ran through the thread quickly but it seems to me that you claimed the article's tax treatment was wrong and have subsequently recanted after adrian2 took you to task. So your post was incorrect. Moreover, the implied threat to snitch to CRA - when you're the one with the faulty interpretation - is pretty low.

All in all, your use of phrases like "only thing he got right" and "as usual" and "glaring example of questionable journalistic practices" rings a little hollow when it turns out you're the one who has had to climb down when his claim was challenged.
If you guys are that afraid of dissenting opinions, are that easily offended and are that afraid of offending your hero then go for it. Ban me.
No one is trying to shut you up.
An apology to him? Not in a million years.
Fair enough, although it's the moderator's call. You've already admitted that your main criticism of the column - inappropriate tax advice - was dead wrong. You've also admitted that your own advice was dead wrong. If you can come up with any other criticism of what's in the column - after all, it's got "loads of other mistakes and examples of mis-information" according to you - I'll certainly be happy to see it.
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smelly
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Post by smelly »

Norbert Schlenker wrote:You've already admitted that your main criticism of the column - inappropriate tax advice - was dead wrong.
I admitted one thing. That when I was trading posts with adrian2 I was wrong about the calculation of the proceeds. Hence the rapid and complete apology to adrian2. But I was never wrong about the calculation of the ACB, which was the only part of the equation I criticized the author for leaving out. A significant omission since it could lead people to overstate their loss by 30%. This may have been a significant factor in their decision to sell and could also land them in hot water with CRA. Maybe you folks and the author don’t care, but I consider this to be very important.

But he makes some comments about tax loss that need to be cleared up. Something most investors, including the column's author, probably don't know is how CRA evaluates capital gains/losses with LSIFs. For a redemption to result in a capital gain, the proceeds must be more than the gross purchase price. Sounds simple and logical, right? You buy $5K and sell for $6K you score a $1K capital gain (and to Bruce and others, yes here have been plenty LSIFs sold at a gain ). BUT, in order to generate a capital loss, the proceeds must be less than the net cost - the gross, reduced by the tax credits. So, you buy for $5K and you sell for $3750 but since it cost you $3.5K after tax, the tax Nazi says “NO CAPITAL LOSS FOR YOU, NEXT”, because you sold it for more than your net cost.
As people love to tell me, re-read the post, Norbert. You ran through it way too quickly.

BTW, does no one else think the author’s drive-by mudslinging regarding the alleged conversation with the LSIF exec isn’t a low shot? Is this acceptable journalism? And has the author complained about my post to the Administrator? I'd be happy to debate his article and all the discrepancies and errors with him. After I finish with that topic, maybe we could re-open that "Commission is Good" debate/challenge that no one was interested in.
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Post by Dennis »

I think that all you have proved here smelly is that your highly touted tax advantage to your clients in buying your LSF is not as wonderful as you have previously made it out to be.

It would appear that Jon's advice was at least as accurate as yours.
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Post by ModeratorZ »

OK everyone, time to cool it.

Smelly, I'd like to apologize for telling you to apologize to Jon. Apologies are not required here.

However, please keep in mind the following:

1. Check your motives. Before you post anything, please ask yourself "Why am I posting this?" What are you trying to accomplish? Attack the ideas not the person.
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Post by Norbert Schlenker »

smelly wrote:I admitted one thing. That when I was trading posts with adrian2 I was wrong about the calculation of the proceeds. Hence the rapid and complete apology to adrian2. But I was never wrong about the calculation of the ACB, which was the only part of the equation I criticized the author for leaving out. A significant omission since it could lead people to overstate their loss by 30%. This may have been a significant factor in their decision to sell and could also land them in hot water with CRA. Maybe you folks and the author don’t care, but I consider this to be very important.
I agree that knowing the correct ACB is important when it comes to taxes but that holds true for every investment, not just LSIFs. Should every article in the paper that deals with securities sales provide details on how to fill out Schedule 3 next April? If not, then what's your motive for singling out this particular article?
As people love to tell me, re-read the post, Norbert. You ran through it way too quickly.
It happens. It was a busy day and I was skimming. :oops:
BTW, does no one else think the author’s drive-by mudslinging regarding the alleged conversation with the LSIF exec isn’t a low shot? Is this acceptable journalism?
It's gossip.
I'd be happy to debate his article and all the discrepancies and errors with him.
Send him an invitation. You have his email address. If he won't, then I'm happy to discuss it even though I don't have the advantage of having seen the original piece. It would help, though, if you'd start by pointing out "all the discrepancies and errors". So far, you're up to one omission and, as I argued above, where should a paper draw the line on repeating the basics?
After I finish with that topic, maybe we could re-open that "Commission is Good" debate/challenge that no one was interested in.
Dig it up. But I have a lot of sailing planned. :D
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Post by smelly »

Dennis wrote:I think that all you have proved here smelly is that your highly touted tax advantage to your clients in buying your LSF is not as wonderful as you have previously made it out to be.

It would appear that Jon's advice was at least as accurate as yours.
If this is anything but a just a meaningless throw away comment that you posted because you think it sounded witty but in fact says nothing and is intended simply to insult me, maybe you could explain what exactly you mean by these two comments?
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Post by smelly »

ModeratorZ wrote:OK everyone, time to cool it.

Smelly, I'd like to apologize for telling you to apologize to Jon. Apologies are not required here.

However, please keep in mind the following:

1. Check your motives. Before you post anything, please ask yourself "Why am I posting this?" What are you trying to accomplish? Attack the ideas not the person.
I don't know how it's posible to attack a message but not the messenger but I'll give it a go.
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Post by adrian2 »

Norbert Schlenker wrote:
smelly wrote:I'd be happy to debate his article and all the discrepancies and errors with him.
Send him an invitation. You have his email address. If he won't, then I'm happy to discuss it even though I don't have the advantage of having seen the original piece. It would help, though, if you'd start by pointing out "all the discrepancies and errors". So far, you're up to one omission and, as I argued above, where should a paper draw the line on repeating the basics?
I second Norbert's curiosity for "all the discrepancies and errors".
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