Looking For Investment? 5 Investee FAQs About Atlantic Canada’s Small Business Investor Tax Credit Programs
July 14, 2015
By Adel Gönczi, Partner at McInnes Cooper,
Julie Robinson, Partner at McInnes Cooper,
Ryan Baxter, Lawyer at McInnes Cooper
Are you an Atlantic Canadian entrepreneur pitching for investment in your small business? You might want to consider adding a tax credit benefit for investors to your pitch by registering your business under one of Atlantic Canada’s provincial investor tax credit programs.
Every Atlantic Canadian Province has some form of an investor tax credit program:
Here are the answers to the 5 questions that small businesses seeking investment most frequently ask about Atlantic Canada’s provincial investor tax credit programs*:
1. What does my business get? An incentive to encourage “eligible investors” (as the relevant program defines) to make an equity investment. To find out who’s an “eligible investor” in each Atlantic Canadian Province, read McInnes Cooper’s: Investing in Atlantic Canada – 5 Investor FAQs About Atlantic Canada’s Small Business Investor Tax Credit Programs. And while securities laws in each Province prohibit a private corporation from publicly soliciting investors (with some exceptions under specific programs), it’s important to build a relationship with any potential investors before you apply for registration under one of these programs:
NB. The program registration application requires you to demonstrate that serious investors are interested and that you know them.
NS. The program registration application requires you to demonstrate that at least three investors are interested.
NL. If your business is certified in the NL program you only get a 3 month window in which to raise up to $3M from eligible investors.
PEI. The company must apply to the Share Purchase Tax Credit program before an investor makes the investment in the company for that investment to be eligible under the program.
2. What do investors get? Shares – and income tax credits. “Eligible investors” in each Province may qualify for an annual, non-refundable provincial income tax credit by the respective province. The amounts vary by Province, but the credits range from 10% up to 50% for eligible investments depending on the location, the investment target and the nature of the investor. To find out more about the investor benefits in each Atlantic Canadian Province, read McInnes Cooper’s: Investing in Atlantic Canada – 5 Investor FAQs About Atlantic Canada’s Small Business Investor Tax Credit Programs.
3. What businesses are eligible to register under the program? The eligibility requirements vary by Province:
NB. A small business with active business income in any business sector is eligible to apply to register under the NB program provided it satisfies the registration criteria:
- a private company incorporated or registered to carry on business in NB;
- authorized capital consisting of shares without par value;
- net tangible assets of less than $40M (including associated corporations);
- all, or substantially all, of its assets and income used to generate active business income in NB; and
- it must pay, in each of the 4 years after the registration date, at least 75% of its wages and salaries to individuals who are NB residents; but if it exports more than 50% of its goods and services outside of NB, then it must only pay 50% of its wages and salaries to individuals who are NB residents.
NS. A small business with either an active business or an investment in another eligible business is eligible to apply to register under the NS program provided it satisfies the registration criteria:
- a company incorporated in NS, in another province or federally, with its head office in NS, or an association incorporated in NS – but not a business incorporated for the professional practice of an accountant, dentist, lawyer, medical doctor, veterinarian or chiropractor;
- authorized capital consisting of at least one class of voting equity shares or an association that carries on business as a marketing, producer or employee co-operative;
- assets and revenues each of less than $25M (including affiliated companies);
- all, or substantially all, of the fair market value of its property is used in an active business or for investment in shares of another eligible business;
- it must pay at least 25% of its salaries and wages in NS and it (or affiliated companies) must have fewer than 500 employees; and
- none of its directors or officers are directors or officers of another entity that’s not in compliance with the program rules.
NL. A small business engaged in a specified eligible industry – and not engaged in an excluded industry, and that meets the criteria are eligible to apply for certification. These are the eligible industries: technology, research and development, aquaculture, forestry and agrifoods, manufacturing and processing, export/import replacement businesses, tourism or cultural industries. These are the ineligible industries: wholesale, retail, food and beverage services; personal services, business services, professional practices and trades, real estate marketing and development, oil and gas development and production, mineral resource exploration, financial services, fish harvesting or primary fish processing (except processing of underutilized species as the Minister designates). The business must also meet these criteria:
- a private Canadian controlled corporation, with a permanent establishment in NL;
- less than $20M in assets (including associated corporations);
- will utilize in NL all the capital raised under the NL program, only for one of the eligible industries;
- has a maximum of 50 full-time equivalent positions; and
- has at least $25,000 of shareholder equity and/or shareholder loans before applying for certification.
PEI. The business must be active in one of these strategic sectors: export-focused manufacturing and processing; interactive, information and communications technology; aerospace; life sciences; renewable energy. It must also satisfy the registration criteria:
- maintain a permanent establishment on PEI; and
- pay 75% or more of its salary payroll to employees resident in PEI.
4. How do I register my small business under the program? Each program has its own registration requirements; successful registrants will get a certificate of registration to issue shares under the relevant program. But be aware: registration under any of the programs will take some work, so this route might not be a good fit if, for example, you’re only trying to raise a small amount.
NB. To register, an applicant must submit:
- a completed application form that includes an investment plan that complies with the program requirements, such as disclosure of specified information about each prospective investor;
- copies of its income tax return from the previous taxation year and its most recent financial statements;
- copies of its incorporation instrument and its corporate share registry;
- the directors’ certification that the application is complete and accurate; and
- each proposed investors’ certification that she understands the holding requirements for the shares (see McInnes Cooper’s: Investing in Atlantic Canada – 5 Investor FAQs About Atlantic Canada’s Small Business Investor Tax Credit Programs) and has read the investment plan.
NS. To register, an applicant must submit:
- a completed application form, certified by an officer of the applicant;
- a brief business plan;
- copies of its income tax return and financial statements from the previous taxation year;
- copies of its incorporation instrument and its corporate share registry; and
- a list of, and statements from, at least three prospective investors that comply with program requirements.
NL. To register, an applicant must submit:
- a completed application form that includes an investment plan that complies with the program requirements and states the corporate name and amount to be raised;
- copies of the income tax return from the previous taxation year and the most recent financial statements, for the applicant corporation and associated corporations;
- a copy of its incorporation certificate;
- a list of directors of the applicant corporation and their addresses; and
- the directors’ certification that the application is complete and accurate.
PEI. To register, an applicant must submit a completed Business Development Application.
5. What do I have to give to investors who want to invest in my business under the program? Technically, nothing (except the shares), except in PEI where you must give the investor your registration certificate when he pays for his share(s). But savvy investors in other Provinces will probably ask you for a copy of your registration certificate to satisfy them that your business is registered under the relevant program. And registration under the relevant program isn’t a guarantee by the Province of the value of the shares your business issues under the program or an opinion about its financial condition, so potential investors will want to perform some due diligence on your business and will probably also ask for other information; you’ll have to give them the answers if you want their investment.
*This article doesn’t deal with some specific provincial programs, such as the NS community economic-development corporation (CEDC) or labour-sponsored venture-capital corporation 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.
© McInnes Cooper, 2015. All rights reserved. McInnes Cooper owns the copyright in this document. You may reproduce and distribute this document in its entirety as long as you do not alter the form or the content and you give McInnes Cooper credit for it. You must obtain McInnes Cooper’s consent for any other form of reproduction or distribution. Email us at [email protected] to request our consent.
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