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 it 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 3 years. With limited exceptions, an eligible investor who transfers their shares within this 3 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 3 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 2 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 ten 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.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.