Venture capital funds suit those with risk, time

Working Opportunity Fund is Western Canada’s largest venture capital fund.  In existence since 1992, the privately managed fund qualifies for a combined 30% tax credit evenly split between federal and provincial governments on investments that can be used to reduce the amount of income tax individuals will have to pay.

Tax Credits:  The BC Tax Credit limit is $2,000 in any one year, and the Federal Tax Credit limit is currently $750 per year.  Neither have lifetime limits.  Let’s assume an investor purchased $5,000 of WOF.  The combined tax credit would be $1,500.   The net cost of the investment would be $3,500 ($5,000 less $1,500 tax savings).   An investment of $5,000 would enable investors to fully utilize the Federal Tax Credit and partially utilize the BC Tax Credit.  Investments greater then $5,000 and less then $13,333 have limited appeal since they will only benefit from the BC Tax Credit.  Investments over $13,333 have even less appeal as those amounts do not qualify for either BC or Federal Tax Credits.

RRSP Eligible:  In addition to provincial and federal tax credits, the WOF investments are also eligible to be held within an RRSP.   For an individual in the top marginal tax bracket, a deduction of $2,185 ($5,000 x 43.7 per cent) is also eligible.  Some advisors may highlight the fact that a $5,000 WOF that is put within an RRSP has a net cost of $1,315 ($5,000 – $1,500 – $2,185).   Since most investments are RRSP eligible we urge investors not to view this as a significant benefit with this type of investment.  We recommend that investors obtain a clear understanding of the types of investments that are eligible and suitable for an RRSP.

Determining Suitability:  The primary importance when investing is to ensure that an investment is suitable for you given your risk tolerance and investment objectives.  Tax minimization should be considered a secondary investment objective.  The merits of an investment should always supersede a decision to invest purely to minimize income tax.  WOF is considered venture capital and we classify this type of investment as more suitable for those investors who have a higher risk tolerance and a longer time horizon.  Another item to consider prior to purchasing WOF funds is your investment needs.  These types of investment typically do not pay an income and therefore are not suitable for those requiring income.

Liquidity:  Another secondary investment objective is liquidity.   Liquidity is the ability to sell the investment into cash, ideally without penalties.  The typical holding period for the Working Opportunity Funds is 8 years.  Shares may be redeemed early in a limited number of situations including:  bankruptcy, disability, permanently unable to work, involuntary loss of employment, or death.  In these cases, an early redemption fee of $75 would be payable to WOF and if the redemption is within 5 years of the purchase date then the federal and provincial tax credits would have to be repaid.

Investment Performance:  Performance numbers for past Working Opportunity Funds may be accessed through the website  Many of the funds have posted negative performance numbers since inception.  One important component we recommend investors to look at is the Management Expense Ratio (MER) on these funds.  Research will reveal that the MER is generally higher than regular mutual funds.  Higher fees ultimately impact performance.  Although past performance is not a predictor of future performance, it should be an integral part of doing your due diligence.

The Rule of 72:  If you are earning a nine per cent annual rate of return, how long will it take to double your money? Assuming various rates of return, The Rule of 72 can help you understand how long it may take to double your money. For example, if your target rate of return is nine per cent, then you simply divide 72 by nine to determine that it will take eight years to double your money.  In eight years, $10,000 will become $20,000.  If you are able to generate an average return of ten per cent, you will have $20,000 in approximately seven years.  If you are earning an average return of 5 per cent, it will take over 14 years to double your money.

Doubling Your Money















Some investors may be attracted to WOF investments solely for the tax credits.  We recommend that individuals look at past performance numbers even though “past performance is no indication of future performance”.  A mandatory holding period of eight years is a very long time, therefore, in our opinion the higher MER, historical performance and locked in features make other investment options more attractive.

Strategy to consider:  Investors who have WOF investments within their RRSP may feel they have no flexible options for eight years.  One simple strategy that generally costs only $25 is to swap the WOF investments out of an RRSP and into a non-registered account for an equal amount of cash.  WOF investments generally do not pay income so it is quite possible that the swap could reduce your annual taxable income.  Another benefit to holding a WOF in a non-registered account is that if the value declines below the market price at the time of the swap then the investor will at least be able to claim a capital loss.

Before implementing any strategies discussed in our columns we recommend that you speak with your financial and tax advisors.