What is the Small Business Venture Capital Tax Credit and why do I care?
Having your business designated as an Eligible Business Corporation (EBC) is a highly effective way to attract new investors. Eligible BC-based individual or corporate investors may apply for the Small Business Venture Capital Tax Credit (the Credit) worth an amount equal to 30% of their investment in an EBC, making it one of the most lucrative credits available to investors in BC.
The Credit is governed by lengthy and complex legislation, with several dozen unique requirements covering everything from entrance eligibility, restricting use of funds, investor eligibility and more. As such, we have written this article to explain what is necessary to know to simplify the process and ensure that you, as a business owner, are ready to register your business as an EBC.
Who administers the Small Business Venture Capital Tax Credit?
The Credit and EBC accreditation is the result of the Investment Capital Program (ICP), an initiative administered by the Investment Capital Branch (ICB) of the BC Ministry of Jobs, Trade and Technology, which has been established for the purposes of expanding small business’ access to sources of private capital in order to create growth in key industries.
What do I need to know?
Below is an excerpt from the ICB’s website showing, in the center yellow column, what the process looks like for investors investing in an EBC, along with some of the criteria for maintaining EBC eligibility:
(1) Eligible Business Corporation Information
- The EBC must be involved in a qualifying business activity as described in the top image to this post. These are industries that the government has identified as having strategic importance to provincial economic growth.
- The EBC must meet certain requirements upon registration in the Program such as having less than 100 employees and having raised more than $25,000 in equity capital.
- The EBC must agree to the potential of a compliance audit throughout enrollment in the Program.
- The EBC must complete annual reporting requirements to the Ministry.
- There are restrictions on how the tax credit supported equity capital can be used, such as restricting investment in purchases of land, restricting investing to purchases made in BC, and restriction of lending to a third party or as a return of capital to equity investors.
(2) Eligible Investor Information
- Eligible individual investors can invest up to $400,000 annually in an EBC and receive a refundable tax credit for 30% of the invested capital, or up to a $120,000 maximum credit annually. The tax credit can be carried forward for up to 4 years.
- Eligible corporate investors can invest an unlimited amount annually in an EBC and receive a non-refundable tax credit for 30% of the invested capital. The tax credit can only be applied against BC taxes payable. The tax credit can be carried forward for up to 4 years.
- The investor must be a BC resident.
- The investor must not control the EBC individually, or in combination with the investor’s associates or related parties.
- The investor must hold the shares of the corporation for a minimum of 5 years following the date of investment or be subject to repayment of the tax credit issued on a prorated basis.
(3) Venture Capital Corporations
- A Venture Capital Corporation (VCC) is a corporation created specifically for the purposes of pooling eligible individual or corporate investor’s capital and investing this capital in Eligible Small Businesses (ESBs). See the right side blue column in the image above. ESBs are closely related to EBCs, carrying similar restrictions with some exceptions that will not be discussed here. Please contact us for more information on VCCs.
At first glance it seems there is quite an administrative burden to enroll in the ICP and register as an EBC. However, the benefit of doing so is a significant increase in the potential returns for your investors. Being able to make this offer to investors will help you stand out from the crowd. What’s more, it will show that your business has reached a level of maturity that will inspire the confidence of potential investors.
How can we help?
We are available to provide any of the following services:
- Advise business owners on obtaining EBC status for their business,
- Advise investors with due diligence and risk reduction services prior to making an investment in an EBC,
- Advise on the creation of a VCC.