The Small Business Venture Capital Tax Credit Program (the “Program”) is a lesser known program under The Income Tax Act (Manitoba) that incentivizes investments in eligible issuer corporations in the province.
Under the Program, eligible issuer corporations can issue eligible shares for proceeds of up to $10 million to eligible investors and these investors will receive a 45% non-refundable tax credit.
Eligible investors must invest a minimum of $10,000 in eligible small businesses and may invest up to a maximum of $450,000. Accordingly, they can claim a minimum tax credit of $4,500 or a maximum tax credit of $202,500, although the maximum they can claim in a tax year is $67,500. Any unused tax credit may be carried forward up to 10 years or carried back three years.
The Government of Manitoba’s Economic Policy and Programs Branch must approve the issuance of any eligible shares under the Program. When an application is approved, the issuer corporation must issue the eligible shares within the 12-month period set out in the approval notice, unless an extension is granted. Issuers must provide an eligible investor with a tax credit receipt no later than 30 days after issuing eligible shares to the investor.
The Government of Manitoba recently announced that for the 2021 tax year, the maximum allowable investment under the Program will be increased from $450,000 to $500,000 and the maximum yearly tax credit will be increased from $67,500 to $120,000. These changes, however, are not yet enacted.
Applications for the Program
Small businesses applying for the Program must include:
- a copy of their most recent financial statements;
- a copy of their most recent income tax return and notice of assessment issued by the Canada Revenue Agency (CRA);
- a copy of the terms and conditions of the Program;
- a description of how they propose to use the proceeds from the sale of eligible shares; and
- if the applicant is a start-up (a company that has not prepared a full year-end financial statement and filed a tax return with the CRA), a letter from their legal counsel or accountant in the form acceptable to the Government of Manitoba.
Application forms for the Program must be submitted in person, by mail, courier or email to:
SBVC Tax Credit Program
Economic Policy and Programs Branch
Suite 1010 – 259 Portage Avenue
Winnipeg, Manitoba R3B 3P4
Eligible shares are new common shares (or certain non-redeemable preferred shares) of the issuer corporation, with a prescribed three-year holding period for eligible investors. Subject to exceptions in the event of an eligible investor’s death or a buy-out, the investor may not transfer the eligible shares during the holding period without the issuer corporation, not the eligible investor, facing a penalty equivalent to the tax credit on the transferred eligible share amount.
For a small business to qualify as an issuer corporation, it must:
- be a Canadian Controlled Private Corporation (as defined in the Income Tax Act (Canada)) with a permanent establishment in Manitoba;
- use all, or substantially all, of its assets in active business;
- derive all, or substantially all, of its revenue from active business;
- have issued at least $25,000 in equity prior to the issue of any eligible shares;
- have either 100 or fewer full-time equivalent employees or less than $15 million in gross revenue;
- have at least 25% of its employees reside in Manitoba;
- not be a reporting issuer pursuant to The Securities Act (Manitoba); and
- have previously issued less than $10 million in eligible shares under the Program.
For investors to qualify for the Program, they must:
- pay for and receive the eligible shares after the issuer corporation has received approval from the Government of Manitoba to participate in the Program;
- pay for and receive the eligible shares during the 12-month approval period (unless an extension is granted);
- not have been a specified shareholder (a shareholder that owns, directly or indirectly, 35% or more of the issued shares of any class of the capital stock of the issuer corporation or its affiliates) within the past 24 months;
- be an accredited investor (as defined under applicable securities laws) or sign a prescribed Acknowledgement of Risk Form;
- not have disposed of any capital stock of the issuer corporation or an affiliate within the past 24 months; and
- have paid at least $10,000, but not more than $450,000, for the eligible shares.
With these requirements in mind, companies interested in using the Program should consider their initial ownership structure and the timing of their application and equity financings.
Using the Proceeds Received from Eligible Shares
An issuer corporation must use the proceeds it receives through the Program within the three-year holding period, and only for approved purposes. According to the Program, eligible issuer corporations cannot use the proceeds for any of the following purposes:
- to invest outside Manitoba;
- to lend to others;
- to pay for a business reorganization;
- to pay a dividend or return capital to a shareholder;
- to pay an amount owing to a shareholder, an affiliate, or a person related to a shareholder or affiliate;
- to purchase, develop or maintain land or equipment for sports;
- to support an ineligible activity (as summarized below); or
- to support an activity that does not promote economic development or is contrary to public policy.
The following business activities are ineligible for the Program:
- providing professional services that are regulated by a governing body of the profession under an act of the Manitoba Legislature;
- providing management, administrative, financial or other similar services, unless they are provided primarily to one or more affiliates of the provider;
- providing maintenance services, unless they are provided primarily to persons with whom the provider is dealing at arm’s length;
- leasing, developing or selling real property;
- exploring for, developing or processing mineral, oil or gas resources;
- farming, except for commercial crop production in a climate-controlled environment, fishing, hunting or a similar activity, but not the processing of products from those activities;
- holding, operating or granting franchises;
- operating a restaurant, lounge, bar or similar establishment, unless the Liquor and Gaming Authority of Manitoba has granted a brew pub endorsement on a liquor service licence issued in respect of the premises;
- providing services, if they are provided on behalf of a corporation by a specified shareholder of the corporation who, but for the existence of the corporation, would reasonably be regarded as an officer or employee of the person or partnership to whom the services are provided;
- operating amusement or gaming facilities or activities;
- operating facilities for the performing arts or organizing performing arts events; or
- providing educational, health care, social or other similar services.
If issuer corporations do not abide by the legislation and regulations governing the Program, they will be subject to a penalty of up to 45% of the proceeds from the sale of their eligible shares.
Companies and investors that are interested in participating in the Program should review the legislation and regulations governing the Program, visit the Program website and speak to their own advisers.
If you have any questions about your eligibility under the Program, please contact the author directly.
Note: This article is not exhaustive of all possible legal or tax considerations with respect to the Program or the consequences of acquiring, holding or disposing of eligible shares of an eligible issuer corporation. Accordingly, this summary is of a general nature only and is not intended to be legal or tax advice. 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.