Eligible Business Corporations and Venture Capital Corporations – What Are They?
The British Columbia Small Business Venture Capital Act (the “SBVCA”) creates two programs designed to encourage investment in early-stage companies in emerging industries in British Columbia: the Venture Capital Corporation (“VCC”) program and the Eligible Business Corporation (“EBC”) program. These programs allow certain corporations to provide eligible investors with access to a 30 percent tax credit.
Eligible Business Corporation Program
To qualify as an EBC, a business must meet certain criteria under the SBVCA. In particular, an EBC must:
- have 100 employees or fewer at the time of the initial investment;
- pay at least 75 percent of wages and salaries to BC employees (reduced to 50 percent in certain prescribed circumstances);
- be engaged in an eligible business activity (described below);
- have raised a minimum of $25,000 in equity capital prior to registration;
- maintain a permanent establishment in BC; and
- maintain at least 80 percent of its assets in BC.
Once registered, an EBC must apply for an equity authorization under the program for the current tax year. Equity authorization applications are approved at the discretion of the Investment Capital Branch and there is no assurance that an EBC will receive the full amount applied for. Tax credits claimed are on a first come, first served basis. In 2021, claims were suspended prior to the end of the year as the tax credit claims had exceeded the budget for the venture capital program. It is therefore important to ensure that claims for tax credits are made promptly after funds from eligible investors have been invested.
Investors in EBCs must be BC residents or a corporation with a permanent establishment in BC, be dealing at arm’s-length to the EBC and cannot directly or indirectly control the EBC. Shares issued by the EBC to investors cannot be redeemed, cancelled or transferred (with limited exceptions such as to a registered account) for five years. Each eligible investor is required to complete a Share Purchase Report. Individual investors will receive a refundable tax credit while corporate investors will receive a non-refundable tax credit which can be applied to current or future tax payable.
Contravention of any of the requirements under the SBVCA can result in an EBC losing their registration and exposes the directors and officers of the EBC to liability. In the event of shares being improperly transferred or redeemed within five years of issuance, any tax credits claimed will be required to be repaid by the investor, or an order can be made requiring the EBC itself to repay such amounts.
Venture Capital Corporation Program
A VCC invests in and may provide business and managerial expertise to eligible small businesses (ESBs). VCCs act as investment vehicles between investors and ESBs, with investors in a VCC being eligible for the 30 percent tax credit. The difference between ESBs and EBCs can sometimes be confusing – an EBC is registered under the SBVCA and meets the additional criteria outlined above, while an ESB is not registered under the SBVCA but qualifies for VCC investment. The eligibility criteria for EBCs and ESBs are essentially the same except that an ESB is not required to have raised $25,000 in equity capital in order to be eligible to receive investment from a VCC. As a result, all EBCs are, by definition, ESBs. A VCC that invests in an ESB that is also registered as an EBC would not be eligible to receive the 30% tax credit itself, as VCCs are excluded from the definition of “eligible investors” under the SBVCA.
To be successfully registered under the SBVCA, a VCC must:
- be a BC incorporated company and include the “(VCC)” designation in its name;
- have never carried on any other business other than that of the VCC;
- have or will have at least $25,000 in equity capital; and
- have an authorized share structure consisting of only common shares without par value.
A VCC may only invest the equity capital it raises under the venture capital program in ESBs. In order for a business to be considered an ESB, it must:
- be incorporated in BC, or extra-provincially registered in BC (including by way of federal incorporation);
- have no more than 100 employees at the time of initial investment;
- pay at least 75 percent of wages and salaries to BC employees (reduced to 50 percent in certain prescribed circumstances); and
- be substantially engaged in one or more of the qualified business activities (described below).
In addition, VCC investment in an ESB is prohibited (subject to certain exceptions) if:
- the proceeds of the investment are intended to be used for certain prohibited purposes such as lending, investment outside of BC and payment of debt;
- the investment would result in the VCC controlling the ESB by way of majority investment; or
- a major shareholder of the VCC is, or was within the previous two years, a major shareholder or associate of the ESB.
Qualified Business Activities
Importantly, not every investment in every business qualifies for the tax credit. A VCC can only invest in an ESB that is engaged in a qualified business activity. An EBC is required to be engaged in a qualified business activity to be registered under the SBVCA. The Small Business Venture Capital Regulation designates the following activities as qualified business activities:
- Manufacturing and processing of goods in BC;
- Research and development of proprietary technology;
- Economic diversification and development of community outside the Metro Vancouver Regional District (the “MVRD”) and the Capital Regional District (the “CRD”);
- Development of interactive digital media products that meet certain criteria;
- Development of clean technologies;
- Advanced commercialization involving digital technology tools outside of the MVRD and CRD that assist other businesses to scale-up; and
- Scale-up activities for businesses otherwise qualified under one of the above activities.
It is worth noting that there is a separate tax credit budget for companies located outside the MVRD and the CRD. To be approved under the economic diversification category, two letters of support from local economic development agencies are generally required.
It is important to note that investment into a VCC, EBC or ESB cannot be debt-like, and the funds invested cannot be used to create or to service debt (subject to certain exceptions which require prior approval by the venture capital program Administrator). In addition, the sale of securities of a VCC, ESB or EBC is still subject to all other applicable securities laws and regulations, including applicable prospectus exemptions.
The VCC and EBC programs offer valuable opportunities for BC investors and small businesses. The programs are powerful and well utilized, but ensuring compliance with the various requirements can be complicated. Companies or investors interested in taking advantage of these programs should seek qualified legal and accounting advice.