Ottawa Business Journal

The Ontario government is bowing to pressure from investors and venture capitalists and proposing a long and gradual elimination of the Labour Sponsored Investment Fund tax credit.

The government has been deluged with complaints since announcing its plan to eliminate the credit a month ago. Venture capitalists warned the move would dry up the flow of VC money and create hardship for startups looking to raise cash. The future of the LSIF program was a major topic of conversation at this week's Ottawa VC fair.

Finance Minister Greg Sorbara is now proposing a five-year phase out of the tax credit, rather than immediately eliminating the credit. Instead, the credit will be gradually lowered and finally eliminated at the end of the 2010 taxation year.

The LSIF tax credit will remain at 15 per cent through the end of the 2008 tax year. It will be 10 per cent in 2009 and five per cent in the 2010 taxation year.

"We've consulted the industry, and heard its views," Mr. Sorbara said in a statement. "We're committed to an orderly wind-down of this tax credit, and believe that this schedule will help accomplish that goal."

In Ottawa this morning, Ontario Premier Dalton McGuinty commented on the decision during his speech at the Friday Business Matters breakfast hosted by the Ottawa Business Journal and the Ottawa Chamber of Commerce.

"The fact of the matter is we listened to your concerns about the need for an orderly transition and we acted on those concerns," he said. "We tried to move too quickly and you said we didn't get this right, so we listened. The six-year wind down also gives the new Ministry of Research and Innovation an opportunity to develop venture capital policy that matches our long-term research and commercialization goals."

The five-per-cent incremental tax credit offered for Research Oriented Investment Funds will be phased out on the same timetable.

The Ontario Finance Ministry says it will consult further with the industry on transition rules governing pacing, eligibility and other reporting requirements.

The Ontario government has paid out $600 million since the LSIF program began in 1991.