This post was written prior to our January 2017 merger, under our previous firm name, Aikins, MacAulay & Thorvaldson LLP.
The Small Business Venture Capital Tax Credit Program (SBVCTC Program) is established under The Income Tax Act (Manitoba) and the Small Business Venture Credit Tax Credit Regulation.
The SBVCTC Program is a very attractive, but under-utilized investment incentive program available in the Province of Manitoba to assist eligible small business corporations in raising capital and attracting new investors.
How the SBVCTC Program Works
Under the program, an “eligible corporation” may issue “eligible shares” to one or more “eligible investors.” Eligible investors that purchase eligible shares are entitled to receive a 45% non-refundable provincial tax credit on the aggregate amount that they invest in the offering corporation. Eligible corporations may raise a minimum of $100,000 to a maximum of $10,000,000 under the program.
What Type of Securities Constitute “Eligible Shares”?
“Eligible shares” under the SBVCTC Program are new (i.e. issued from treasury) non-redeemable common or preferred shares, that are required to be held by the investor for a minimum of three years. With limited exceptions, an eligible investor who transfers their shares within this three-year holding period may be assessed a penalty equivalent to the tax credit that they received.
What Constitutes an “Eligible Corporation”?
In order for a corporation to meet the eligibility requirements of the SBVCTC Program, it must meet the following criteria:
- be a Canadian Controlled Private Corporation (CCPC) (as determined under Canadian federal tax legislation) with a permanent establishment in Manitoba
- all, or substantially all of the corporation’s assets must be used in active business
- all, or substantially all of the corporation’s revenue must be derived from active business
- the corporation’s stated capital must be at least $25,000 prior to issuing eligible shares under the SBVCTC Program
- the corporation has either:
- 50 or fewer full-time equivalent employees OR
- less than $15 million in gross revenue
- 25% of the corporation’s employees must be Manitoba residents
- the corporation may not be a “Reporting Issuer” (i.e. a public company) as defined in The Securities Act (Manitoba)
- the corporation must not have previously issued more than $10 million in eligible shares under the SBVCTC Program either on its own, or in combination with an affiliated company
It is important to note that if at any time within three years of issuing eligible shares, the corporation ceases to have a permanent establishment in Manitoba or if fewer than 25% of its employees are Manitoba residents, the corporation, not the investor(s), will be subject to tax penalties of up to 45% of the investment proceeds earned from eligible investments.
Corporations which operate in the following sectors are not eligible to participate in the program:
- professional services such as doctors, lawyers and accountants
- providing management services
- leasing, developing or selling real property
- exploring for, developing or processing mineral, oil or gas resources
- farming, fishing, hunting (excluding processing products from these activities)
- holding, operating or granting franchises
- operating a restaurant, lounge or bar or similar establishment
- performing arts, amusement or gaming activities
- providing educational, health care, social or other similar service
Further, proceeds from SBVCTC Program eligible investments may not be used by the recipient corporation for the purposes of:
- making investments outside Manitoba
- lending to others
- paying a dividend or return of capital to shareholder(s)
- paying an amount owing to shareholder(s), an affiliate, or a person related to a shareholder or affiliate
- purchasing, developing or maintaining land or equipment for sports
- to support an activity that is contrary to public policy
Who Qualifies as an “Eligible Investor”?
An investor must meet the following criteria in order to meet the SBVCTC Program eligibility requirements:
- must not own or have owned 35% or more of the issued shares of any class of the eligible corporation (or a related corporation) within the past two years
- must be an “accredited investor” (as such term is defined under applicable securities laws) or must sign and deliver the prescribed Acknowledgment of Risk Form
- must not have disposed of any capital stock of the eligible business or of an affiliate or predecessor of that business
- must invest a minimum of $20,000, subject to a maximum investment amount of $450,000 during the approval period, which is generally a period of six months following receipt of eligibility confirmation by the SBVCTC Program
The maximum tax credit that may be received by an eligible investor is $202,500, and the maximum that can be claimed in any one tax year is $67,500. Any unused tax credit may be carried forward for up to 10 years or carried back for three years.
Before Making an Application or Accepting Subscriptions
It is important to note that approval to issue eligible shares must be received in advance of the applicant issuing shares or receiving cash investment from prospective investors. Corporations wishing to participate in the SBVCTC Program should seek professional advice to determine whether they meet the SBVCTC Program requirements. Applicants to the SBVCTC Program must also understand and be mindful of the restrictions on eligible investors in order to avoid inadvertently restricting the ability of these investors to access the tax credit and, as a result, the added incentive to invest. Furthermore, a myriad of corporate and securities laws must also be complied with in connection with any offering and issuance of securities.
For additional information: Visit the Government of Manitoba’s website.
Note: This article is of a general nature only and is not exhaustive of all possible legal rights or remedies. In addition, laws may change over time and should be interpreted only in the context of particular circumstances such that these materials are not intended to be relied upon or taken as legal advice or opinion. Readers should consult a legal professional for specific advice in any particular situation.
About the Author
Todd Thomson is a partner with Aikins Law. His practice focuses primarily in the areas of corporate and commercial and securities law. Todd advises privately held and publicly traded corporations and investment funds in connection with public and private offerings, mergers and acquisitions, venture capital financings, take-over bids, purchases and sales of businesses, secured transactions, corporate, partnership and joint venture structuring, shareholder and partnership agreements and corporate governance and compliance matters. Todd has a broad base of experience acquired by advising clients in various industries at all stages of development. Connect with Todd on LinkedIn, or reach him at firstname.lastname@example.org.