Don’t Choose Investments Because Of Tax Breaks – Selling My Labour Sponsored Funds

by Mike Holman

As I’ve complained many times over the years, I bought some LSIF (Labour Sponsored Investment Funds) many years ago. These were the worst investment ever. High fees, crazy redemption schedules and poor performance add up to a bad investment. They had great tax breaks at the time, so I committed the cardinal sin of letting taxes control my investment choice.

Lesson learned – Don’t ever buy an investment solely for tax reasons.

Lesson 2 – Don’t ever buy LSIFs. They are a bad investment.

The last of my funds came due in February of 2010, but I’m only now getting around to redeeming them. I think my reluctance to sell these funds stems from two reasons:

  1. Small amount – The amount of the funds is small enough that it wasn’t critical to sell them right away.
  2. Redemption freezes – I’ve heard that many LSIF funds have frozen redemptions so you can only get money out of them at certain times. Canadian Capitalist wrote about LSIF redemption freezes a while back along with Jon Chevreau of the National Post.

The funds I originally bought have changed hands and names numerous times.  The funds I own are called CIG6940 VentureLink Brighter Future I (yah right) and CIG987 Covington Venture Fund Inc. Sr. I.

I had these funds at Questrade discount brokerage where I keep all my investments.  After placing the orders, nothing happened for a couple of days which made me wonder if the funds were restricting redemptions.  I phoned CI, who looks after administration for both of these funds.  The rep was able to determine that the trades were placed as wire orders. This means that Questrade places the orders with CI to sell the funds and then follows up later with the documentation which will allow the trades to settle.  Sure enough, three days later I received confirmation that the trades were completed.

The value was a bit over $5,000 which is ever so slightly down from the original purchase price of $15,500. Because of the tax breaks associated with LSIFs, my true cost was around $10,000.  Considering most of the funds were bought between 1996 and 2002, the final result is pretty disappointing. Any other kind of investment would have done much better.

Canadian MoneySense had a good article about Canadian tax shelters with a similar warning to not let taxes be the sole driver of your investment decisions.  The article also references MURBs which were a tax-sheltered real estate investment which didn’t do so well.  Interestingly enough, my Dad made a similar investing mistake in the 70’s, and his investment poison was MURBs.

Lesson learned

As has been written elsewhere – don’t invest your money based only on tax considerations. Buy investments low and sell them high – the taxes will take care of themselves.

Any other LSIF/bad tax break investment survivors out there?  Let’s hear your story in the comments!

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{ 12 comments… read them below or add one }

1 Canadian Capitalist

I think a lot of us got burned by these venture capital funds. It is a very good lesson not to let tax incentives alone drive investment decisions.

2 Steve Zussino

Out of all my investments in my RRSP , I can’t wait to sell these.

It actually did well the first 2 years but mine is such a dog now.

I would advice against purchasing anything associated with this.

3 Mike Holman

@CC – Yes, experience is a great teacher. 🙂

@Steve – Mine did quite well for a while during the tech bubble, which of course is why I bought more of them. 🙂

4 Dd

Thanks for sharing one of your losses–you are motivating me to stop hiding me big C loss this year :*(

Any thoughts what you will do with your $5,000?

5 Mike Holman

@Double D – The money will stay in cash for now. I need to spend some time rebalancing – I haven’t done that in ages and have built up quite a bit of cash in my RRSP.

6 SophieW

Mine was called GrowthWorks (I think) and my mutual fund advisor (salesman) convinced me it was such a great deal… I put in $2500 (which was a lot back then!) and received ~$500 in tax breaks. I finally was allowed to redeem them last year and walked away with a wopping $700 – woohoo! I still wonder how much money that advisor made off all us chumps he sold it to…

7 Mike Holman

Sophie – thanks for the comment. I don’t remember the exact details, but I recall that LSIFs paid higher DSC commissions than normal mutual funds. So a lot of financial “advisors” *rolls eyes* made some extra coin off of LSIFs.

8 gene

I like your comment about $5,000 being “ever so slightly down” from $15,500. If you can’t laugh…

I got an investing lesson quite some time ago by losing $8,000 on Bre-X. That loss was spread only over a few weeks (I bought almost immediately before the scandal broke… unbelievable timing) as opposed to the years it took for you to lose your $10,500. Kind of like the difference between tearing off a band-aid and trying to finesse it.

9 Mike

That’s rough Gene! In fact I remember a friend of mine and I were considering buying some Bre-X in the last few days on the chance that it wasn’t a fraud.

Luckily we didn’t do it. 🙂

I don’t know if it’s better to pull the bandage off quickly or over a decade. 😉

10 rick

I bought into this junk also, been waiting forever to sell them but didn’t want to pay back all the tax and this year i can FINALLY kiss them goodbye, along with most of my investment of course

11 Giles

In 1999 my investor at BMO suggested I invest in the same, extolling the benefits of tax savings and 100% capital repayment 10 years later. I was too young to know any better and invested $5000 into new millenium. Well 4 years later the fund was taken over by Covington and then was mixed together with a bunch of other failing funds and is now called Covington Venture Fund. I’m just finding this out now, and someone at Covington is finding out if I can still get 100% repayment.
I guess I wont hold my breath.

12 Mark

Could be worse. After selling the allowed 10% of Covington CIG958 and 961 the last couple years I was told in April that as of September 1, 2015 restrictions would be lifted. Stupid me for not setting my alarm to do that immediately. September 4 Covington again implemented total 100% no sales restriction. Found out when I tried to place sell order this morning, Sept 11. And GrowthWorks CDN I… almost 300 units held… value ZERO. Worst mistake ever getting sold on these things by my EX adviser.

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