Canada: Saskatchewan Tech Companies Seeking Financing Rejoice: Your Investors Now Have Serious Tax Perks

Last Updated: October 26 2018
Article by Joe Gill

Announced on April 10, 2018, the Saskatchewan Technology Startup Incentive (STSI) provides early-stage tech companies with an attractive offering to potential investors: get 45% of your investment back in the form of a non-refundable tax credit. The program started accepting applications on October 1, 2018 but is retroactive to April 11, 2018.

The purpose of this blog post is to provide a reference on the key points of the STSI, namely:

  1. The amount of government funds set aside for the STSI
  2. Eligibility Requirements and Application Process for Tech Companies
  3. Eligibility Requirements and Application Process for Investors
  4. Eligibility Requirements and Application Process for Venture Capital Corporations

All parties interested in the STSI should bookmark the Innovation Saskatchewan website. The website will contain updates on the STSI program as time goes on. The website also includes useful links to all documents related to the STSI (such as summary documents, program guides, and links to relevant legislation).

(1) How much money are we talking about?

For each fiscal year, the Government of Saskatchewan establishes a "pot" of tax credits that can be given to investors in tech companies. Once the "pot" is gone, investors no longer get tax credits. The remaining budgets (as of the date of this blog) for the following years (each year ends on March 31) are as follows:

  • 2018-19 – $1,500,000
  • 2019-20 – $2,500,000
  • 2020-21 – $2,500,000
  • Future Years – Unknown (the Government has committed to reviewing the STSI to decide whether it will continue)

These numbers will fluctuate regularly; it is recommended that tech companies actively monitor the Innovation Saskatchewan website to find current numbers.

When analyzing that "pot" of tax credits, tech companies need to keep a few things in mind:

  • Investment Limit – No investor gets a credit for an investment of more than $500,000. If someone is putting more money than that into your start-up, (i) that's awesome, and (ii) they will only get tax credits for the first $500,000. Also keep in mind the 45% effect: if you have an investor putting in $500,000, they are getting tax credits of $225,000 (i.e. 45% of $500,000). Consequently, this limit could also be stated as $225,000 in tax credits per investor.
  • Credit Claim Limit – On top of the investment limits, investors are limited to claiming $140,000 in tax credits received from the STSI per tax year. Using that 45% rate again, this means they are essentially limited to claiming approximately $311,000 of their investment per tax year. Not to fret through: any unused tax credits can be carried forward for 4 years.
  • Tech Company Limit – Unfortunately, even if you are scaling fast and attracting big dollar figure seed or pre-seed money, each tech company is limited to $1,000,000 of investment that benefits from the STSI. The big key point here: the STSI program "renews" each year on April 1 – lining up your financing rounds to close in and around this date will be critical to taking advantage of the "pot".

(2) Eligibility and Application Process for Tech Companies

First, the tech company looking to position its equity as eligible for the Saskatchewan Technology Startup Incentive will want to satisfy the following:

  • Fewer than 50 employees, with at least 50% of them located in Saskatchewan (there is a pro-rating for part-time employees)
  • Registered to carry on business in Saskatchewan (this means either (i) the tech company was incorporated in Saskatchewan, or (ii) the tech company is extra-provincially registered with Information Services Corporation, Corporate Registry)
  • Has not previously raised more than $5,000,000 in equity capital (this includes shares as well as share rights such as options, warrants, and seemingly convertible securities and SAFEs)
  • Head office in Saskatchewan
  • The equity being offered is either shares, warrants, options, or rights entitling the holder to acquire shares (this should be expansive enough to cover SAFEs as well as convertible notes)
  • The equity being offered does not have any of the following rights: (i) create a debt between the investor and any other person, (ii) entitle the investor to reduce the impact of any loss the investor might sustain from either holding or selling the equity, and (iii) give the investor a right to require the tech company to repurchase the equity within 2 years after issuance.
  • The equity raise contemplates each investor paying for their investment in cash, in full, on closing (i.e. no deferred payment plan)
  • No proposed investor will be acquiring a control position in the company (generally understood to be more than 50% of the voting securities but also watch for giving investor rights to elect a majority of the company's board, likely in a shareholders' agreement)
  • There aren't multiple "related companies" set up to try and multiply access to the STSI (the Government has the power to treat multiple companies as 1 company if it feels the only reason there are multiple companies is to multiply access to the STSI)
  • The potential investors satisfy securities law requirements, generally meaning they are either (i) accredited investors, or (ii) close family, close friends, or close business associates of founders or directors of the company (tip for capital raising: this website will apparently be keeping a list of approved accredited investors for the STSI)

Second, the tech company will complete the application itself (see also here), which will need to include:

  • Business plan
  • If they exist, copies of most recent (i) annual financial statements, and (ii) financial forecast
  • Description of company's product, service, or process that concerns "development of a novel technology or the use or combining of technology in a novel way" (keep in mind that the Government will look at, and so you should mention in your application, (i) whether the tech is novel, (ii) the company's plans to market the tech, and (iii) the company's plans to scale through increased sales and market penetration beyond Saskatchewan)
  • Evidence of having a permanent establishment in Saskatchewan (program isn't clear on this but presumably items such as utility bills, Canada Post directory, or copy of a lease should suffice)
  • If it exists, a copy of the company's most recent income tax return and notice of assessment from Canada Revenue Agency
  • Statement of how much equity capital is being raised
  • Description of proposed use of the funds that the company will raise (the company cannot use the funds for any of the following: (i) lending money, (ii) buying land unless it ties into the company's business model, (iii) putting the funds in a high-interest savings account, (iv) buying GICs, (v) buying or trading other shares, (vi) buying goods or services from the company's investors, subsidiaries, parent companies, or controlling shareholders, unless the transaction is at fair market value, (vi) paying down debts unless required to ensure the company's financial viability, (vii) buying back its shares except where a shareholder is insolvent or has died, (viii) paying dividends, (ix) paying back money owed to a shareholder, or (x) buying assets from another business at more than fair market value)
  • Statement (signed by an officer of the tech company) attesting to the completeness and accuracy of the information in the application and any accompanying documents
  • Evidence (satisfactory to the Government) that, at the time of the application, (i) the company's product (or product concept) is accepted by the market for which it is intended, and (ii) the market is willing to purchase the product (this is a vague requirement but presumably evidence of either sales or market validation exercises should suffice)
  • Potentially other information the Government may want (this is a catch-all that effectively gives power to the Government to ask for additional information as it sees fit)

Third, after receiving the all-important Tax Certificate (which makes the company eligible for the STSI), the tech company will need to ensure that it prepares an annual report and files it with the STSI Program Administrator. That report needs to be filed within 6 months of the tech company's year-end. The specifics required in the report will be set out here but will at minimum include (i) copy of the tech company's securities register (i.e. its list of shareholders and the amount of shares each owns), (ii) most recent financial statements prepared in accordance with GAAP and reviewed by a Chartered Professional Accountant, and (ii) most recent corporate annual return filed with Information Services Corporation.

Fourth, and finally, the tech company will need to ensure that no investor transfers their "STSI-eligible" shares within 2 years of issuance. The only exceptions are where (i) the shareholder is insolvent, (ii) the shareholder transfers their shares to a TFSA, RRSP, RRIF, or spousal RRSP, (iii) the shareholder is dead, or (iv) the tech company goes through a reorganization transaction (e.g. acquisition) that keeps its substantive operations in Saskatchewan.

(3) Eligibility and Application Process for Investors

For potential investors, the process is quite simple and boils down to satisfying the following:

  • If an individual, being a resident of Saskatchewan (this is a factual inquiry that looks at more than just a physical address in Saskatchewan; the analysis itself is borrowed from the Saskatchewan and federal tax legislation)
  • If a corporation, having a permanent establishment in Saskatchewan (same comments as in the brackets for the previous point)
  • Being either an "accredited investor" or a family member, close friend, or close business associate of a founder or director of the tech company (this is a more complex securities law analysis; for an initial primer, see here)
  • Completing an application form using the online portal here (see here also for a sample application)

Investors should also review the points made above concerning limits on the amount of tax credits they can receive under the Saskatchewan Technology Startup Incentive. In addition, investors should regularly review the Innovations Saskatchewan website as it will purportedly keep an updated list of tech companies that qualify for the STSI.

(4) Eligibility and Application Process for Venture Capital Corporations

First, a venture capital corporation (VCC) looking to take advantage of the Saskatchewan Technology Startup Incentive will have to ensure the following:

  • It has mechanisms in place (satisfactory to the Government) to track investor contributions into tech companies that benefit from the STSI
  • It has equity capital of at least $25,000
  • It has a share structure consisting of one or both of the following: (i) common shares with no special rights or restrictions, or (ii) common shares having special rights relating only to the redemption of those shares by the VCC
  • It does not intend, in any given year of the STSI program, to apply for either (i) tax certificates representing more than 33% of the total "pot" of tax credits available, or (ii) tax certificates for a single one of its shareholders that exceed $225,000.
  • Its share certificates must state (i) the percentage of the entire VCC that the particular share represents (e.g. this share certificate represents X% of the common equity of VCC), and (ii) that the share has been issued pursuant to, and the VCC issuing the share certificate is subject to, The Saskatchewan Technology Start-Up Incentive Act
  • It has satisfied itself that its potential investment targets (i.e. tech companies compliant with those items in part (2) above) are not using the VCC's funds for prohibited purposes (i.e. those purposes discussed above that a tech company is not permitted to use its funds for)
  • It does not invest in any tech company where a shareholder of the VCC is also a holder of more than 10% of the shares of that tech company
  • The funds the VCC intends to raise do not benefit from any other tax incentives (such as the labour-sponsored venture capital corporation incentives in Saskatchewan)
  • It does not intend to acquire a controlling position (i.e. more than 50% of the voting shares) in any tech company

Second, the VCC will complete the required application (see here – also here for a sample application).

Third, after receiving the all-important Tax Certificate, the VCC will need to ensure that it prepares an annual report and files it with the STSI Program Administrator. That report needs to be filed within 6 months of the VCC's year-end. The specifics required in the report will be set out here but will at minimum include:

  • amount of capital raised by the VCC
  • total value of all investments made by the VCC, the name of each tech company where the VCC sold its shares and the value of those shares
  • the amount of expenses incurred by the VCC and the amount paid for management fees
  • whether fees were paid to shareholders, directors, officer or directors of the VCC by a tech company in which the VCC invested
  • whether the corporate articles of the VCC were amended in a manner that changed the share structure of the VCC or altered any rights/restrictions attached to any share of the VCC
  • amount of all dividends received by the VCC from tech companies in which it invested
  • whether the VCC redeemed any of its shares and, where it did, information about (i) the name of the investor who was redeemed, (ii) the date of the redemption, (iii) the number of shares redeemed, (iv) the original amount paid by the investor for the redeemed shares, and (v) the amount of money paid by the VCC for the redeemed shares
  • whether the VCC paid any expenses to any person who, on the date of payment, controlled (i.e. held more than 50% of the voting securities) the VCC

Final Thoughts

The Saskatchewan Technology Startup Incentive is a welcome accompaniment to existing tech incentives in the Province of Saskatchewan such as the Saskatchewan Commercial Innovation Incentive and the Research and Development Tax Credit. It also helps provide yet another financing alternative to tech companies in addition to existing federal, provincial, and private sources (see here for a great list of financing options). As mentioned above, tech companies will want to put April 1 in their calendars each year and make sure that their financing rounds end in and around this date (or else risk missing out on the "pot" of tax credits).

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.

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