December 9, 2014
Note: This Update includes changes to the programs made by the 2015 budgets of each Province.
Have you considered investing in an Atlantic Canadian small business as a tax tool? Maybe you should: it’s a win for Atlantic Canada’s small businesses and for their investors.
Every Atlantic Canadian Province has some form of an investor tax credit program:
Here are the answers to the 5 questions investors most frequently ask about Atlantic Canada’s provincial investor tax credit programs.
1. What do I get? Income tax credits. “Eligible investors” in each Province may qualify for an annual, non-refundable provincial income tax credit on qualifying investments covered by the respective program, though the amounts vary by Province:
NB. Individuals may qualify for a 50% credit (to a maximum of $125,000/year) for investments (to a maximum of $250,000/year) made after March 31, 2015, and for a 30% credit (to a maximum of $75,000/year) for investments (to a maximum of $250,000/year) made before then; corporations and trusts may qualify for a 15% corporate income tax credit (to a maximum of $75,000/year) on investments (to a maximum of $500,000/year).
NS. “Eligible investors” may qualify for a 35% credit (to a maximum of $17,500/year) for investments (to a maximum of $50,000/year). If the investment is in a community-economic development corporation (CEDC), the eligible investor may qualify for further provincial income tax credits of 20% after 5 years and 10% after 10 years if the CEDC meets certain conditions.
NL. The tax credit to which “eligible investors” may be entitled varies depending on the location of the eligible small business (but the location of the eligible investor in NL is doesn’t matter). Eligible investors may qualify for a credit of up to $50,000, being 20% of the investment in eligible businesses located in the “North East Avalon” area (defined by the program) and 35% of the investment in eligible businesses in the remainder of NL (if a single business undertakes qualifying activities both in and out of the North East Avalon area, a reasonable pro-ration of these rates will apply). Investors must hold the shares to which tax credits apply for the first 5 years after issuance.
PEI. “Eligible investors” may qualify for an income tax credit of 35% (to a maximum of $35,000/year) on a qualifying investment.
2. Who’s an “eligible investor”? Who (or what) can qualify depends on the Province:
NB. An individual can qualify if he is at least 19 years old; is a NB resident; invests at least $1,000 and holds that investment for at least 4 years; and acquires the shares without financial assistance from government, municipalities or public authorities. Corporations and trusts investors can qualify if it is permanently established (defined by Federal income tax laws) in NB; invests at least $50,000 and hold that investment for at least 4 years; and acquires the shares without financial assistance from government, municipalities or public authorities – but they can’t hold (directly or indirectly) more than 50% of the shares with the power to elect directors or otherwise control the registered small business.
NS. An individual (or his RRSP) can qualify if he is at least 19 years old and a NS resident. The investment can’t be eligible for any other tax credit or deduction allowed under the Income Tax Act, except as a deduction for RRSP purposes, and the eligible investor must hold the investment for at least 5 years (or up to 15 years in the case of a CEDC, depending on the tax credit the investor received – see FAQ 1 above).
NL. An individual who is at least 19 years old and is a NL resident or otherwise pays NL income tax can qualify. A corporation subject to NL corporate income tax may qualify in respect of its arm’s length eligible investments. The investment may be held in an RRSP.
PEI. An individual can qualify if he is at least 19 years old and a PEI resident when he makes the investment.
3. Can I invest in any small business? No; in each Province, only investments in a small business “registered” under the relevant provincial program qualify for the tax credit and in each, a small business must meet certain requirements to register. Registered small businesses receive a certificate of registration to issue shares under the relevant program. However, none of the Provinces maintains a publicly available list of small businesses registered under its provincial program, although the NS law requires the Minister of Finance to maintain a list to be “open for public inspection during normal business hours”. Therefore, investors in each Province must satisfy themselves that the small business is indeed registered before investing by obtaining the official Certificate of Registration from the small business.
4. Do I have to use the tax credit immediately? No. In PEI, the Program’s policy allows eligible investors to claim the tax credit in the year in which it made the investment and/or in the 2 subsequent years, effectively allowing it to carry an unused tax credit balance forward for 3 years. In all other Provinces, the provincial income tax laws may allow eligible investors to carry an unused tax credit balance forward 7 years or back 3 years.
5. Can I invest only in certain business sectors? Effectively, “yes” in every Province except NB. Provinces can effectively limit the sectors in which eligible investors can invest under the relevant program by restricting the registration qualification criteria to certain sectors. NB doesn’t require a business to be (or not to be) in a particular sector to qualify for registration, so in NB you can invest in a small business in any sector – from IT to professional services – as long it’s registered under the program. Every other Atlantic Province will only issue registration certificates to small businesses in (or not in) specific sectors – but for the investor, the key is to look for the registration certificate under the relevant program:
NS. Professional corporations for certain services (for example, accountants or doctors), and businesses that don’t use their property in an active business or for investment in another eligible business organization won’t meet the registration criteria – so investments in them won’t qualify under the NS program.
NL. Only businesses engaged in these sectors can qualify for registration: technology, R&D, aquaculture, forestry, agrifoods, manufacturing, export/import replacement, tourism and cultural industries. Investments in the following industries are not eligible: wholesale, retail, food and beverage services, personal services, business services, professional practices, trades, real estate marketing and development, oil and gas development and production, mineral resource exploration, financial services, fish harvesting and primary fish processing (except processing of underutilized species as designated by the Minister), or any other activity which, in the Minister of Finance’s opinion isn’t in keeping with the program’s spirit and intent. Effectively, only investments for which approval is granted qualify under the NL program.
PEI. Only businesses in a strategic sector will qualify for registration under the PEI program. The strategic sectors include export-focused manufacturing and processing, interactive, information and communications technology, aerospace, the life sciences and renewable energy. In effect, then, only businesses in these sectors will be able to register – and only investments in them might qualify – under the PEI program.
Looking for investment? Read McInnes Cooper’s: 5 Investee FAQs About Atlantic Canada’s Small Business Investor Tax Credit Programs.
Please contact your McInnes Cooper lawyer or any member of our McInnes Cooper Small Business Team to discuss this topic or any other legal issue.
McInnes Cooper has prepared this document for information only; it is not intended to be legal advice. You should consult McInnes Cooper about your unique circumstances before acting on this information. McInnes Cooper excludes all liability for anything contained in this document and any use you make of it.
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