For those who are familiar with the popular Small Business Venture Capital Tax Credit Program (the "SBVCTCP") in Manitoba, there is a much lesser-known and used tax credit program offered and available in the province called the Employee Share Purchase Tax Credit Program (the "Program").
While the parameters for approval under the SBVCTCP are very narrow, the Program is much broader. For this reason, the Program may provide an alternative path for small businesses to raise capital and tackle succession planning.
What is the Program?
With the aim of supporting business growth, facilitating succession planning for family businesses and promoting employee ownership in businesses, the Program allows current Manitoba employees of an eligible corporation to purchase shares of that company through a pre-approved employee share ownership plan ("ESOP") and receive either a partial and/or fully refundable 45% tax credit, as applicable.
The Program is divided into two types of purchases by employees through the pre-approved ESOP:
ONE. If the purchase by the employee is in connection with a general program aimed at promoting employee ownership, the purchase is eligible for a 45% fully refundable tax credit of up to $27,000 on a maximum purchase of up to $60,000 per year.
TWO. If the purchase by the employee is in connection with succession planning, business takeovers and/or buyouts, the employee is eligible for a 45% tax credit of up to $202,500 on a maximum purchase of up to $450,000 per year. The initial $27,000 of the tax credit is fully refundable to the employee. The remaining amount of the tax credit can be applied against the employee's Manitoba personal income taxes in that year, in the three prior years or in the following 10 years, up to a maximum of $67,500 (less the refundable portion of the tax credit).
If the succession plan exceeds two years, the Program will only allow the employee to start with the first option above and receive a maximum tax credit of up to $27,000 on a maximum purchase of up to $60,000 per year. Once the employee is prepared to take over the business, the Program will approve the second option.
What companies are eligible to use the Program?
An eligible company under the Program is a company that:
- Has a pre-approved ESOP with the Program;
- Is a Canadian-controlled private company with a permanent establishment in Manitoba;
- Has assets being used in an active business;
- Generates revenue from an active business;
- Has less than $10 million in net assets and $25 million of gross assets; and
- Pays at least 25% of its employee remuneration to employees who are Manitoba residents.
A company is specifically not eligible if it:
- Is a bank, credit union or caisse populaire;
- Provides services as a trustee to the public;
- Carries on business of insurance or as a trader or dealer of securities;
- Is a business whose primary business is lending money, cashing cheques, purchasing and collecting or selling debt obligations, discounting tax refunds or rebates, or any combination of these activities;
- Derives more than 50% of its revenue from any combination of the businesses of 1 to 4 above; or
- Is a prescribed labour-sponsored venture capital corporation.
Who is eligible to use the Program?
The Program is only available to employees of an eligible company (or an affiliate thereof), who are residents in Manitoba and who purchase shares of that company pursuant to a pre-approved ESOP.
What is an ESOP?
An ESOP is a form of employee benefit plan or program that allows employees to purchase shares and/or receive shares from the company in lieu of cash compensation. An ESOP must be pre-approved with the Program before any eligible shares can be issued in connection with the Program.
In addition, the ESOP must also be in compliance with the relevant provisions of the Income Tax Act (Manitoba) and its regulations. The ESOP must contain the following features:
- The shares of the company may not be issued until they are fully subscribed for;
- All of the eligible employees under the ESOP shall have equal rights;
- The shares of the company issuable under the ESOP may only be one single class of share; and
- A maximum of $10 million may be raised under the ESOP.
While we recommend that you consult with your own advisers in preparing a qualified ESOP, a template of an ESOP is available on the Program's website should you wish to consult it.
What is required for the application?
A company must submit the following items to the Program as part of any application for approval under the Program.
- The company's most recent annual financial statements;
- The company's most recent income tax return;
- The company's most recent Canada Revenue Agency notice of assessment;
- A copy of the company's ESOP;
- The terms and conditions applying to the shares to be issued under the ESOP;
- Indication of the years and/or months requested for the ESOP approval;
- A signed statement by an officer of the company that the company is eligible under the legislation to approve an ESOP;
- A signed statement by an officer of the company of the amount of equity capital to be raised under the plan;
- An attestation by an officer of the company as to the completeness and accuracy of the application; and
- A copy of the company's articles of incorporation and any amendments.
Can you use the SBVCTCP and Program at the same time?
The Program will not approve the SBVCTCP and Program at the same time. Eligible companies that have approval for one program, and hope to use the other program, can obtain approval once the approval of their current program is terminated or expired.
Companies that are interested in participating in the Program should review the legislation and regulations governing the Program, visit the website and speak to their own advisers. If you have any questions about your eligibility under the Program, please contact the author directly.
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.
