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Two news items from these days: one local, one national.
1. The Crocus investors were demonstrating in front of the legislature building in Winnipeg, Manitoba.

2. The government decided to change the tax rules for income trusts. A lot of comments after.

Crocus

I can feel the pain of these investors. They hoped an exceptional gain and now are left with almost nothing. However, who in their right mind would invest their retirement saving in a venture capital fund?

Don’t let yourself mislead by the fancy name: labour sponsored investment fund (LSIF)… At their bottom line they are in the venture capital business. It’s not a secret: “LSIFs are designed to attract venture capital investment funds to smaller firms” - as you can find it on CBC’s website after a half minute Google searching. Another quote from the same page goes like this: “Venture capital investments, by definition, are all risky. The companies have little track record and most are not publicly traded. Many will go belly-up; others will stagnate”.

Even banks that usually would do anything to get your money, admit the risky nature of such investment: it is important to remember that due to the nature of the companies being invested in, this asset class has an inherently higher level of risk associated with it - reads on TD’s site.

The only problem for the Crocus investors was - and they should be upset only about this and nothing else - they were not told about the risky part. Or, if they were, they never wanted to hear it. The units in this kind of LSIF are sold with the promise of the huge tax breaks. Consider this scenario: you invest $5,000 into the fund. Usually there is a 15% federal tax credit and a provincial tax credit of the same size, another 15%. $750+$750=$1,500 tax credit; so having invested $5,000 costs you only $3,500. Now, if you have that investment in an RRSP, at a marginal tax rate of 46 per cent, you will get a $2,300 tax deduction, which means 5,000-2,300-1,500= $1,200. It’s tempting, you have to admit it! You have an investment of $5,000 growing tax deferred and you paid for it only $1,200. Who wants to hear the warnings quoted above? But if you think this investment will be as risk-free as a GIC, think again! If it sounds too good to be true - it is. It was a risky investment. You can demonstrate as much as you want, although it would be better to spend that time in a library educating yourself about your retirement investments.

By the law, the LSIFs has to be “sponsored” by some kind of trade union or similar worker organization. In the case of Crocus it was mentioned in the news when the scandal erupted that some union members (representatives? - who can remember) were selling this fund to their fellow-members. I am not sure the legislators were thinking about such “sponsoring” when they made the law but it happened. I doubt whether those who sold the Crocus to Average Joe, had a clear understanding what were they marketing…

(Alltogether, the unions shouldn’t be in any kind of business or making politics… but that’s for another entry.)

Unless you have several millions sitting idle, I don’t see any reason to go into the venture capital business. Well, there is one: greed.

Income trusts

As I am sure the greed was behind the idea of setting up the income trust funds to avoid the corporate taxes. The idea is again quite simple. You convert a corporation into an “income trust” (isn’t this an abuse of the verb trust?) and without paying corporate taxes they pass along their profits to investors as cash distribution. Let all the companies do this - and our personal income taxes would go through the roof! This year alone they “saved” about $500 millions in taxes.

Again, let’s take a look at the big picture. You invest in a trust fund because you want a comfortable retirement. But you also want all the services (health care, infrastructure, services) that are paid from taxes. And, of course, not everybody can invest in an income trust. However, everybody’s taxes will go up if the government doesn’t have enough money to provide all the services we think we are entitled to.

Is it ethical to invest in something that makes gains by legally cheating?