Written by Jeff Saunders, CPA, CA | Teed Saunders Doyle, Fredericton, NB
Many provinces across Canada offer a significant tax credit to investors in small businesses as an incentive to encourage investment in this essential part of our economy. The name of the tax credit and the specific criteria and rates vary from province to province. However, in the provinces that do offer this type of tax credit, it can lead to substantial tax savings for investors. For example, in New Brunswick, the non-refundable tax credit is 50% of the amount invested up to $250,000 annually ($125,000 tax credit) for eligible individual investors, and if the investor cannot use the full amount of the tax credit in the year of the investment, the credit can be carried back three years or carried forward seven years.
While not intended as an exhaustive list, here in New Brunswick the tax credit is called the Small Business Investor Tax Credit; British Columbia has the Small Business Venture Capital Tax Credit; Nova Scotia has the Equity Tax Credit and the Innovation Equity Tax Credit; Newfoundland and Labrador has the Venture Capital Tax Credit; Prince Edward Island has the Share Purchase Tax Credit; Manitoba has the Small Business Venture Capital Tax Credit; Yukon has the Small Business Investment Tax Credit; and Alberta had the Investor Tax Credit and the Capital Investment Tax Credit (unfortunately these tax credits were eliminated by the Alberta government in the recent 2019 provincial budget).
Regardless of the name of the tax credit, many of these programs have the common goal of providing an incentive to investors, and as a result, to provide a much needed source of capital for small businesses. Startup businesses have been particular beneficiaries of these tax credit programs as the tax credit provides a way of limiting down side risk for potential investors in risky startup businesses. For example, in New Brunswick, an investment of $100,000 would result in personal tax savings of $50,000 for the investor. As a result, the investor is really only putting $50,000 (net of the tax credit) at risk in his or her investment.
While these programs serve as a great source of capital for startup businesses, they can also assist established businesses looking to grow or invest in new projects. In many cases existing current shareholders can qualify for the tax credits if they are investing new funds into their businesses. Depending on the rules in your province small business owners may want to consider whether it makes sense for them to invest personal funds in their business through this type of tax credit program rather than simply loaning personal funds to their business.
Of course, there will be costs associated with participating in these tax credit programs as many provinces require applications from the business to register in the program, applications from the investors for a tax credit certificate, and annual reporting requirements to ensure that the business continues to meet program requirements. In many cases these forms and reports are technical in nature and may require the assistance of your local DFK tax advisor.
In recent years several provinces have increased the amount of investment that qualifies for the tax credit and the rate of the tax credit, thereby making the programs much more attractive to investors. Some provinces have also extended the programs so that tax credits are now available to corporations and trusts making investments in eligible businesses.
For most of these tax credits, businesses and potential investors have to meet certain criteria and have to apply to register prior to accepting any funds from investors. Some of the criteria include restrictions on which industries qualify; restrictions on how the funds raised can be used; restrictions on a minimum number of investors; minimum and maximum amounts of investments; minimum holding periods for the purchased shares; etc. If your business is looking to raise capital you should talk to a tax specialist at your local DFK affiliate firm to discuss whether your province has such a tax credit, and if so, what are the criteria to qualify?