Canada: Take advantage of the Manitoba small business venture capital tax credit
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The Small Business Venture Capital Tax Credit Program (the “Program”) is a lesser known program under The Income Tax Act (Manitoba) which encourages investment in eligible issuers in the province.
Under the program, qualifying issuers can issue qualifying shares for proceeds of up to $ 10 million to qualifying investors and those investors will receive a 45% non-refundable tax credit.
Eligible investors must invest a minimum of $ 10,000 in eligible small businesses and may invest up to a maximum of $ 450,000. For example, they can claim a minimum tax credit of $ 4,500 or a maximum tax credit of $ 202,500, although the maximum they can claim in a tax year is $ 67,500. Any unused tax credit can be carried forward up to 10 years or back up to three years.
The Government of Manitoba’s Economic Policy and Programs Branch must approve the issuance of any qualifying shares under the program. When an application is approved, the issuing company must issue the eligible shares within the 12-month period set out in the notice of approval, unless an extension is granted. Issuers must provide an eligible investor with a tax credit receipt no later than 30 days after the issuance of eligible shares to the investor.
Small businesses applying for the program should include:
- a copy of their most recent financial statements;
- a copy of their most recent income tax return and notice of assessment issued by the Canada Revenue Agency (CRA);
- a copy of the general conditions of the program;
- a description of how they propose to use the proceeds from the sale of qualifying shares; and
- if the applicant is a start-up (a business that has not prepared a full year-end financial statement and filed an income tax return with the CRA), a letter from its legal or accountant under a form acceptable to the Government of Manitoba.
Application forms for the program must be submitted in person, by mail, courier or email to:
SBVC Tax Credit Program
Economic Policy and Programs Directorate
Office 1010 – 259, avenue Portage
Winnipeg, Manitoba R3B 3P4
Email: [email protected]
Eligible shares are new common shares (or certain non-redeemable preferred shares) of the issuing company, with a prescribed three-year hold period for eligible investors. Subject to exceptions in the event of the death or redemption of an eligible investor, the investor may not sell the eligible shares during the holding period without the issuing company, and not the eligible investor, incurring a penalty equivalent to the tax credit on the amount of the eligible share.
For a small business to qualify as an issuing corporation, it must:
- be a Canadian-controlled private corporation (within the meaning of
Income Tax Act (Canada)) having a permanent establishment in Manitoba;
- use all or substantially all of its assets in the course of an active commercial activity;
- derive all or substantially all of its income from an active business;
- have issued at least $ 25,000 in shares before the issuance of any eligible share;
- have 100 full-time equivalent employees or less or less than $ 15 million in gross revenues;
- have at least 25% of its employees resident in Manitoba;
- not be a reporting issuer under the terms of The Securities Act (Manitoba); and
- have already issued less than $ 10 million in eligible shares under the program.
In order for investors to be eligible for the program, they must:
- pay for and receive eligible shares after the issuing company has received approval from the Government of Manitoba to participate in the program;
- pay and receive eligible shares during the 12 month approval period (unless an extension is granted);
- not have been a specified shareholder (a shareholder who owns, directly or indirectly, 35% or more of the issued shares of any class of the share capital of the issuing company or its affiliates) in the past 24 months;
- be an accredited investor (as defined in applicable securities laws) or sign a prescribed risk acknowledgment form;
- not to have disposed of the share capital of the issuing company or of an affiliated company during the last 24 months; and
- have paid at least $ 10,000, but not more than $ 450,000, for the eligible actions.
With these requirements in mind, companies interested in using the program should consider their initial ownership structure and the timing of their application and equity financing.
Use of proceeds received from eligible actions
An issuing company must use the proceeds it receives under the program during the three-year holding period, and only for approved purposes. According to the Program, eligible issuers cannot use the product for any of the following purposes:
- invest outside of Manitoba;
- lend to others;
- pay for a business reorganization;
- pay a dividend or return capital to a shareholder;
- pay an amount owing to a shareholder, affiliate or person related to a shareholder or affiliate;
- buy, develop or maintain sports grounds or equipment;
- to support an ineligible activity (as summarized below); Where
- to support an activity which does not promote economic development or which is contrary to public policies.
The following business activities are not eligible for the program:
- to provide professional services regulated by a governing body of the profession under an Act of the Legislature of Manitoba;
- provide management, administrative, financial or other similar services, unless they are mainly provided to one or more subsidiaries of the supplier;
- provide maintenance services, unless they are provided primarily to persons with whom the supplier deals at arm’s length;
- rental, development or sale of real estate;
- exploration, development or processing of mineral, oil or gas resources;
- agriculture, except for commercial crop production in an air-conditioned environment, fishing, hunting or a similar activity, but not the processing of the products of these activities;
- the holding, operation or granting of franchises;
- operating a restaurant, lounge, bar or similar establishment, unless the Manitoba Alcohol and Gaming Authority has granted a brewery-brewery endorsement on a service permit. alcohol issued in respect of the premises;
- provide services, if they are provided on behalf of a corporation by a specified shareholder of the corporation who, but for the existence of the corporation, would reasonably be considered to be an officer or employee of the person or partnership to whom the services are provided;
- operation of entertainment or gaming facilities or activities;
- operation of facilities for the performing arts or organization of performing arts events; Where
- provide educational, health care, social or other similar services.
If the issuing companies do not comply with the laws and regulations governing the Program, they will be subject to a penalty of up to 45% of the proceeds from the sale of their eligible shares.
Companies and investors wishing to participate in the program should consult the legislation and regulations governing the program, visit the site Program website and talk to their own advisers.
The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.
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