Canada: Take advantage of the Manitoba Small Business Venture Capital Tax Credit
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The Small Business Venture Capital Tax Credit Program (the “Program”) is a lesser known program The Income Tax Act (Manitoba) which encourages investment in qualifying corporate investees in the province.
Under the program, qualifying corporate issuers can issue qualifying shares for proceeds of up to $10 million to qualifying investors and those investors will receive a 45% non-refundable tax credit.
Eligible investors must invest a minimum of $10,000 in qualifying small businesses and can invest up to a maximum of $450,000. Thus, 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 can be carried forward for up to 10 years or carried back three years.
The Manitoba government’s Economic Policy and Programs Branch must approve the issuance of any eligible stock under the program. When an application is approved, the issuing company must issue the eligible shares within the 12-month period set out in the notice of approval, unless an extension is granted. Issuers must provide an eligible investor with a tax credit receipt no later than 30 days after the issuance of eligible shares to the investor.
Small businesses applying to 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 program terms and conditions;
- a description of how they propose to use the proceeds from the sale of eligible shares; and
- if the applicant is a start-up business (a business that has not prepared full year-end financial statements or filed tax returns with the CRA), a letter from their legal counsel or accountant in a form acceptable to the Government of Manitoba.
Application forms for the program should be submitted in person, by mail, courier or email to:
SBVC Tax Credit Program
Economic Policy and Programs Directorate
Office 1010 – 259 Portage Avenue
Winnipeg, MB R3B 3P4
Email: [email protected]
Qualifying shares are new common shares (or certain non-redeemable preferred shares) of the issuing company, with a prescribed holding period of three years for qualified investors. Subject to exceptions in the event of the death or redemption of an eligible investor, the investor cannot transfer the eligible shares during the holding period without the issuing company, and not the eligible investor, incurring a penalty equivalent to the tax credit on transferred shares eligible share amount.
For a small business to be considered an issuing corporation, it must:
- be a Canadian-controlled private corporation (as defined in the
income tax law (Canada)) having a permanent establishment in Manitoba;
- use all or substantially all of its assets in active business;
- derive all or substantially all of its income from an active business activity;
- have issued at least $25,000 in shares prior to the issuance of any qualifying shares;
- have 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 in accordance with The Securities Act (Manitoba); and
- have already issued less than $10 million in eligible shares under the program.
For investors to be eligible for the program, they must:
- pay for and receive eligible shares after the issuing company has received approval from the Manitoba government to participate in the program;
- pay for and receive eligible shares during the 12-month approval period (unless an extension is granted);
- not have been a nominee shareholder (a shareholder who owns, directly or indirectly, 35% or more of the issued shares of any class of the share capital of the issuing company or its affiliates) within the last 24 months;
- be an accredited investor (as defined in applicable securities laws) or sign a prescribed risk acknowledgment form;
- not having transferred any share capital of the issuing company or an affiliated company during the last 24 months; and
- have paid at least $10,000, but not more than $450,000, for the qualifying 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 financing.
Use of proceeds received from qualifying shares
An issuing company must use the proceeds it receives under the program during the three-year holding period and only for the approved purposes. Under the program, qualifying corporate issuers may only use the proceeds for any of the following purposes:
- investing outside of Manitoba;
- lend to others;
- pay for a corporate reorganization;
- pay a dividend or return capital to a shareholder;
- pay an amount owing to a shareholder, affiliate or person related to a shareholder or affiliate;
- to purchase, develop or maintain sports grounds or equipment;
- to support an ineligible activity (as summarized below); Where
- to support an activity that does not promote economic development or that is contrary to public order.
The following commercial activities are not eligible for the program:
- provide professional services regulated by a governing body of the profession under an Act of the Legislative Assembly of Manitoba;
- to provide management, administrative, financial or other similar services, unless provided primarily to one or more Supplier Affiliates;
- provide maintenance services, unless they are provided primarily to persons with whom the supplier deals at arm’s length;
- rental, development or sale of real estate;
- the exploration, development or processing of mineral, oil or gas resources;
- agriculture, with the exception of commercial agricultural production in an air-conditioned environment, fishing, hunting or a similar activity, but not the processing of the products of these activities;
- hold, operate or license franchises;
- operate a restaurant, cocktail lounge, bar or similar establishment, unless the Liquor and Gaming Authority of Manitoba has granted a craft brewery endorsement on a liquor service license issued in respect of local ;
- provide services, if performed 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;
- operation of entertainment or gaming facilities or activities;
- operation of performing arts facilities or organization of performing arts events; Where
- provide educational, health care, social or other similar services.
If issuing companies do not comply with the laws 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 wishing to participate in the program should review the laws and regulations governing the program, visit the program website and speak to their own advisors.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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