On January 16, 2017, the online application portal for the Alberta Investor Tax Credit (AITC) opened to Alberta small businesses seeking to benefit from the recently introduced AITC and it will remain open until the 2017 budget of CA$28 million has been fully allocated. In short, the AITC is designed to help Alberta small businesses raise equity capital by offering investors a tax credit based on their investment.
The AITC is a 30 percent tax credit available to eligible individual or corporate investors who invest directly or indirectly in Alberta small businesses that are engaged in certain specified industries, including the research, development and commercialization of proprietary technologies. As an example, a qualifying investment of CA$10,000 would reduce the Alberta income tax payable by an individual or corporate investor by CA$3,000. The AITC is available retroactively for eligible investments made on or after April 14, 2016.
The AITC is a tax credit—in contrast to a deduction from taxable income—which reduces Alberta taxes payable by the investor on a dollar-for-dollar basis. For corporate investors, the AITC is a non-refundable tax credit but there is no maximum credit amount and any remainder amounts may be carried forward for up to four years. For individual investors, the AITC is a refundable tax credit which can be used to create a cash refund but the AITC is limited to a maximum annual amount of CA$60,000.
The CA$90 million pool of credits set aside by the Government of Alberta over the next three years for the AITC will be offered on a first-come first-served basis until the budget for each calendar year has been fully allocated.
Example tax benefit
The following example illustrates the tax benefit of the AITC to eligible individual and corporate investors on a CA$200,000 eligible investment, assuming in each case taxable income of CA$100,000:
|Investment in Eligible Business Corporation||$200,000.00||$200,000.00|
|Alberta tax owed - tax rate: 10% / 12%||$10,000.00||$12,000.00|
|Alberta tax owed after AITC||$ -||$ -|
|AITC refund (for the individual)||$50,000.00|
|AITC carryforward (for the corporation)||$48,000.00|
To benefit from the AITC, an investor must be eligible by meeting the definition of either an individual, pursuant to section 35.01 of the Alberta Personal Income Tax Act, or, for a corporation, being liable for Alberta corporate income tax, pursuant to section 5 of the Alberta Corporate Tax Act.
In other words, individuals are eligible if they are resident in Alberta on the last day of the previous calendar year or if they had business income in Alberta on the last day of the previous calendar year. However, an eligible individual investor does not include an estate or a trust. Corporations are eligible if they have a permanent establishment in Alberta.
Eligible Business Corporations
A small business must meet the following qualifications and must apply to the Alberta Minister of Economic Development and Trade (Minister) to register as an Eligible Business Corporation (EBC) starting on January 16, 2017 via an online portal:
- The small business, together with its affiliates, must have no more than 100 employees.
- Subject to certain exceptions, 75 percent of the small business’ wages must be paid to employees located in Alberta.
- The small business must have equity capital of at least CA$25,000.
- The small business’ permanent establishment must be in Alberta and 80 percent of its assets must be located in Alberta.
- The small business must be substantially engaged in the following activities:
- Research, development and commercialization of proprietary technologies
- Development of interactive digital media or video game products
- Development of post-production services including visual effects and animation
- Development or operation of a tourist service.
Once a corporation is registered as an EBC and receives a certificate of registration, the EBC must apply to the Minister for an approval to raise additional equity capital prior to each or any capital raise. After additional equity capital is raised, the EBC must again apply to the Minister for a tax credit certificate entitling each eligible investor to the AITC for the amount they invested during the calendar year. Also, EBCs are subject to annual reporting requirements as set forth in the Investing in a Diversified Alberta Economy Act (Act) which governs the AITC.
For investors in an EBC, the AITC is restricted to investments in equity shares fully paid in cash. The Act defines equity shares as common shares, warrants, options or other rights to purchase or acquire common shares of the EBC. Among other things, the Act expressly excludes convertible debt and certain types of redeemable shares from the definition of equity shares which will presumably have a measurable effect on how direct investments in EBCs are structured going forward. It is important to note that existing securities laws in Alberta relating to the offering and sale of securities, including shares, continue to apply, so EBCs should ensure compliance with such laws as they participate in the AITC program.
In addition, it is important to note that the Act requires that an investor is required to repay the AITC if the investor disposes of the equity shares which are the subject of the AITC within five years of acquiring such shares.
The Act also sets out a number of investment limits on both EBCs and individual investors. First, an EBC cannot raise more than CA$5 million pursuant to the program during the corporation’s lifetime. Second, an individual investor cannot claim more than CA$60,000 in tax credits under the AITC per calendar year with a four-year carry-forward of any unused investor tax credit amount. There is no maximum tax credit for corporate investors.
Venture Capital Corporations
Another interesting feature of the Act is the establishment of the Venture Capital Corporation (VCC). VCCs are intended to operate as venture capital funds that make eligible equity investments on behalf of their shareholders. Shareholders of VCCs will be entitled to AITC certificates as if they were directly holding shares in EBCs. To register as a VCC, a corporation must:
- Be incorporated or continued under the Business Corporations Act (Alberta)
- Not have previously carried on business
- Have equity capital of at least CA$25,000
- Have a share structure that consists of common shares or common shares redeemable by the corporation
- Have certain prescribed provisions in its articles
The Act contains relatively restrictive rules on the activities of VCCs. This includes restrictions against taking a majority interest in the VCC’s portfolio companies and restrictions against any involvement in non-arm’s length transactions. VCCs will also be subject to annual reporting requirements provided by the Act and associated regulations. It is important to note that existing securities laws in Alberta relating to the offer and sale of securities, and relating to the registration requirements for portfolio managers and investment fund managers, continue to apply, so VCCs should ensure compliance with such laws as they participate in the AITC program.
With the introduction of the AITC, Alberta joins ranks with British Columbia, Nova Scotia, New Brunswick, Manitoba and a number of US jurisdictions which have similar investor credit programs. These programs have been generally viewed as successful. British Columbia, for example, estimated that its venture capital program resulted in at least CA$2.3 billion of new equity investments in British Columbia. During the same observation period, 2 percent of corporations in the British Columbia program went public while an additional 7 percent of corporations in the program were acquired. These trends were also coupled with lower failure rates by program participants as compared to non-participants.
From the perspective of Donald Leitch, Q.C., the Managing Partner of Dentons’ Calgary office, the AITC is an encouraging sign for startups and venture capital in Alberta. He notes: “The program will encourage the flow of venture capital dollars into Alberta while making the province a desirable jurisdiction for startups.”