On January 1, 2017, the Investing in a Diversified Alberta Economy Act (the “Act”) came into force. The Act is part of the Alberta Jobs Plan, and its objectives are to boost investment in Alberta’s small and medium-sized businesses, drive innovation, diversify the economy and create new jobs. The Act pursues these objectives by way of three tax credit initiatives: the Alberta Investor Tax Credit (the “AITC”), the Capital Investment Tax Credit, and the Community Economic Development Corporation Tax Credit. The Act is a first for Alberta and is modeled on similar legislation that has been successful in generating investments for several years in other provinces, such as British Columbia and Ontario.
The following discussion focuses on the AITC. It contains an explanation of the tax credit based on the content of the Act, the AITC Regulations (the “Regulations”), the AITC program guidelines and the legislative debate in relation to the Act.
The AITC is intended to bring Alberta investors and small businesses together. The AITC offers a 30% tax credit for investments made in eligible Alberta businesses by individuals or corporations. The credit is available retroactively starting April 14, 2016. It has been estimated that this credit will support up to 4,400 new jobs over three years and contribute up to $500 million to Alberta’s GDP.
The AITC is available for investments in “non-traditional” sectors of Alberta’s economy. In particular, it is aimed at small Alberta businesses substantially engaged (at least 50% of the business activities) in eligible business activities (the “Eligible Business Activities”), namely:
- tourism activities;
- research, development and commercialization of proprietary technologies;
- development of interactive digital media in Alberta; and
- post-production, visual effects and digital animation.
The AITC has an aggregate budget over three years of $90 million and is offered on a first-come, first-served basis. Once the budget is allocated, the program will no longer be offered.
Eligibility for investors is limited to individual and corporate investors who pay personal or corporate taxes in Alberta. In addition, the investor must meet the definition of “eligible investor” in section 35.01 of the Alberta Personal Income Tax Act (“Section 35.01”) for an individual or Section 5 of the Alberta Corporate Tax Act (“Section 5”) for a corporation.
Under Section 35.01, the term “individual” does not include an estate or a trust. In addition, Section 35.01 specifies that the maximum tax credit that an individual investor may receive under the AITC is $60,000 per taxation year (derived from a $200,000 investment). The tax credit is refundable and may be carried forward for up to four years.
A corporation is eligible under Section 5 if it has a permanent establishment in Alberta. There are many ways to demonstrate a permanent establishment in Alberta, including, but not limited to: having a fixed place of business, including an office, a branch, a mine, an oil well, a farm, a timber land, a factory, a workshop or a warehouse in Alberta. There is no maximum credit for a corporation, however, the maximum a corporation is able to directly invest in a single company is $5 million. The tax credit is non-refundable and may be carried forward for up to four years.
Individual and corporate investors have the option of investing directly into an Eligible Business Corporation (“EBC”) or investing indirectly into an EBC by purchasing equity in a Venture Capital Corporation (“VCC”). The investment into the EBC or VCC must be held for at least five years from the date of share issuance, otherwise the tax credit may be revoked. This holding period is intended to ensure the business has the capital for an appropriate length of time so that it may be used for operations and growth.
a) Eligible Business Corporation
There are several requirements for a corporation to register as an EBC, some of which are:
- carry out an Eligible Business Activity;
- be incorporated or continued under the Business Corporations Act (Alberta);
- be a “small business”, which is a corporation that has no more than 100 employees and affiliates;
- have equity capital of at least $25,000;
- have more than 80% of its assets located in Alberta; and
- make payment of wages to employees who report to work in Alberta,
- if the small business is engaged in the export of goods from Alberta or the provision of services outside of Alberta, at least 50% of the wages, or
- for all other small businesses, at least 75% of the wages.
b) Venture Capital Corporations
VCCs may invest in small businesses that conduct business in any of the Eligible Business Activities, but are not registered as EBCs. There are several requirements that a VCC must meet in order to be registered, some of which are:
- be incorporated under the Business Corporations Act (Alberta);
- not have previously carried on business;
- have equity capital of at least $25,000 at the time of registration;
- have a share structure consisting of only common shares that have no special rights or restrictions; and
- have articles of incorporation that restrict the VCC’s business to assisting the development of eligible small businesses.
Businesses who wish to benefit from investments made under the AITC initiative must apply for the AITC as either an EBC or a VCC. Businesses wanting to qualify as an EBC or VCC should apply for the AITC as soon as possible so they may begin raising capital before the maximum budget is reached. Once registered, the Minister will issue a certificate of registration, which will allow the corporation to raise capital under an available exemption from the prospectus requirement set out in the Securities Act (Alberta).
There is no minimum investment required by the AITC program, and both individuals and corporations are able to invest under the AITC. Eligible investors include:
- ‘accredited investors’ as defined in National Instrument 45-106 Prospectus Exemptions (“NI 45-106”);
- a ‘family, friend and business associate’ of a director, executive officer or control person of the corporation, or of an affiliate of the corporation;
- corporate investors that invest not less than $150,000 paid in cash; and
- individuals that are not ‘accredited investors’ or a ‘family, friend and business associate’, provided the corporation meets the requirements for a prospectus exempt investment as set out in NI 45-106.