30% Tax Refund for Investors!!
Under a relatively little known provincial investment capital program, B.C. resident investors can get a tax refund for 30% of the amount of their investment. Here’s how it works:
- The company that will receive the investment first submits a simple application for registration to the provincial Investment Capital Branch as an “Eligible Business Corporation” (“EBC”) under the Small Business Venture Capital Act (BC) and obtains an allocation from the annual tax credit budget.
- The EBC must (i) have no more than 100 employees, (ii) pay at least 75% of its wages to BC residents (50% if the EBC exports it goods or services), (iii) have previously raised at least $25,000 in equity capital (e.g. cash for shares) and (iv) be engaged in a prescribed business activity.
- The following business activities will generally be eligible under the program: (i) manufacturing and processing of goods, (ii) development and operation of a destination tourist resort, attraction or service (where at least 50% of the gross revenue is derived from tourists), (iii) research and development of proprietary technologies, (iv) activities carried on outside of the Greater Vancouver Regional District or the Capital Regional District and which promote economic diversity within the region, (v) development of interactive digital media for commercialization (vi) development of “green” technologies for commercialization and (viii) non-traditional agricultural activities (including game farming, specialized small crops, livestock and poultry production and high technology enterprises).
- The investor invests cash in the EBC in exchange for common or preferred shares and completes a simple one page Share Purchase Report. In some cases a convertible debenture will also be eligible if it meets certain prescribed criteria. Share Purchase Reports are submitted online by the EBC along with a Tax Credit Application. Investors receive a tax credit form directly from the province which is then attached to their federal tax return.
- The investor must be a BC resident or a taxable BC corporation at the time of the investment. Individual investors receive a refundable tax credit equal to 30% of the amount invested. There is an annual maximum of $60,000 of tax credits for individuals. There is no annual maximum for corporate investors, but the credits are not refundable. Unused tax credits (individual or corporate) can be carried forward and used in any of the four subsequent tax years.
- The investor must be dealing at arm’s-length to the EBC and cannot directly or indirectly control the EBC. Shares issued by the EBC to the investors cannot be redeemed, cancelled or transferred for five years.
In addition to the “direct investment” program described above, investments can also be made indirectly through a separate “venture capital corporation” incorporated for that purpose under a related investment capital program. There are a number of important differences between the “direct” and “indirect” programs and these should be discussed with your legal and/or tax advisors.
The 30% tax credit program is designed to be easy to manage and implement. It is an excellent way for investors to reduce their risk and/or leverage their investment capital, especially if the investment is also RRSP eligible, but the program budget is limited to $30 Million of tax credits annually in four eligibility categories. Fortunately, there is still a significant amount of equity allocation available for Fall 2009 and many different kinds of local businesses will be eligible.