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Business Commentary Trudeau’s promise to revive labour fund credit won’t boost innovation

The new Liberal government isn't wasting any time making good on key election promises.

So far, they've unveiled the country's first half-female cabinet and returned the mandatory long-form census. They are poised to raise taxes on the 1 per cent early next month.

But there is another promise that should stay buried in the party's campaign platform – a vow to reinstate a 15-per-cent tax credit for investors in labour-sponsored venture capital funds, such as GrowthWorks and the Quebec Federation of Labour's $11.1-billion Solidarity Fund.

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The Conservatives wisely moved in 2013 to phase out the tax break ending in 2017.

The credit cost the government $140-million in lost revenue last year, adding to the billions of dollars it has spent on the tax break since the mid-1980s.

It's not clear what the country got in return for that money. The federal Finance Department acknowledged in 2013 that the credit is "an ineffective means of stimulating a healthy venture capital sector."

The C.D. Howe Institute issued a similarly blistering indictment of the program in a 2007 report: "Canada's [labour-sponsored venture capital corporations] are inefficient, may have poor governance structures, charge high fees and earn economic returns that lag those of 30-day, risk-free treasury bills."

In a recent blog post, University of Victoria associate professor Lindsay Tedds, a former tax specialist at the federal Finance Department, called the tax break one of Canada's "stupid tax policy initiatives."

And so it's a bit of a mystery why the Liberals would vow months before the election to reinstate the credit. Perhaps they felt they needed to bolster support in Quebec, where the Solidarity Fund and its union parent are a potent political force, or maybe it was part of the party's efforts to outflank the NDP and its union allies.

The Liberal platform defends labour-sponsored funds, saying they "help small and medium-sized businesses get off the ground, creating jobs and economic growth … [and in Quebec] serve as an important retirement savings vehicle."

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The labour-sponsored fund sector has generally been in decline across the country, except in Quebec, where the Solidarity Fund remains popular with investors. Elsewhere, the industry has been badly tarred by fund failures, poor returns and Ontario's 2010 decision to end a matching provincial tax credit. Several provinces still offer credits of their own, including Quebec, British Columbia and Saskatchewan.

The Solidarity Fund has cleverly cast the end of the credit as a "hidden tax hike" of more than $400 a year on its average investors.

But the real fear may be that, without federal subsidies, investors will shun the fund in today's low-return environment. The Solidarity Fund has a potentially existential problem – waves of retiring boomers who have invested large chunks of their RRSP savings. The fund acknowledged in its recent year-end statement that the end of the federal tax credit will contribute to a possible "slow and gradual" shrinking of its assets as investors cash out faster than they buy in. That means less clout in the province.

The Solidarity Fund insists that even without the federal credit, it can generate a reasonable return and meet redemptions. But fund officials have acknowledged it may have to reduce its investments in Quebec companies and cut its risk profile to deal with the unkind demographics.

The Solidarity Fund has another problem that should concern Mr. Trudeau and the Liberals. Very little of the fund's money is invested in what most people consider true venture capital – tech startups and the like.

Its taste in investments is sometimes more eclectic. According to wiretaps released by Quebec's Charbonneau Commission, the former head of the fund acknowledged using money to pay for half the cost of a luxury yacht for Tony Accurso, a construction boss now facing a raft of fraud and corruption charges. More recently, the fund said it wants to invest in a new NHL team sought by Quebec City.

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A 2012 study by the University of Calgary's School of Public Policy found that generous federal tax credits have mainly subsidized Solidarity Fund investments in publicly traded stocks, government bonds, loans, hedge funds and money market funds. As little as 5 per cent of the fund's assets constitute "true" venture capital, the study concluded.

Canada has an innovation problem, but labour-sponsored funds aren't the solution.

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