2017 Issue No. 2 12 January 2017 Tax Alert Canada Alberta s Venture Capital Tax Credit EY Tax Alerts cover significant tax news, developments and changes in legislation that affect Canadian businesses. They act as technical summaries to keep you on top of the latest tax issues. For more information, please contact your EY advisor or EY Law advisor. The Alberta Government has introduced the Alberta Investor Tax Credit (AITC) in order to stimulate investment in certain industries with strong job-creation potential. The AITC offers a 30% tax credit to investors who provide venture capital to eligible companies during the three-year period in which the AITC program is in force. It is offered on a first come, first served basis. The program will start accepting applications on 16 January 2017. In this Tax Alert we provide a general overview of the AITC. A full understanding of all the applicable legislation and regulations is strongly suggested before submitting an application. Overview The AITC is a three-year program that will provide a tax credit to Alberta investors who provide venture capital to small Alberta businesses that are engaged in certain eligible business activities. In order to receive the tax credit, corporations and individuals who are liable to pay income tax in Alberta may invest directly in an eligible business corporation (EBC) or in a venture capital corporation (VCC) that subsequently makes eligible investments in an EBC. The AITC will be offered on a first come, first served basis and has a budget of $90 million over three years. The Government of Alberta will keep a public record of remaining funds for reference.
The EBC or VCC will first need to register through an online portal. Once the registration is approved, the registered EBC or VCC applies for approval to raise equity capital. After the equity is raised, the EBC or VCC applies for the tax credit certificate, and once this application is approved, the tax credit certificate is provided to the EBC or VCC for distribution. EBCs and VCCs cannot guarantee their investors will receive a tax credit certificate, as those certificates are issued on a first come, first served basis. Investments made as of 14 April 2016 may be retroactively eligible for the AITC. However, the business that received the investment must register in this program in 2017. Eligible business activities The EBCs are required to be substantially engaged in specific business activities to be eligible for the program. The specific business activities include: Development and operation of a destination tourist resort, a tourist attraction or a tourist service, if 50% or more of the gross revenue is derived from tourists and the resort, attraction or service is located outside of a national park. A tourist is defined as an individual who resides more than 40 km away from the destination or resort. Examples provided by the Government of Alberta include resorts, skiing facilities, amusement and recreation industries, RV parks, campgrounds, zoos and botanical gardens. Research, development and commercialization of proprietary technologies produced within Alberta, including services that are directly associated with the export of the technology. Costs in this category can include operation of a demonstration or prototype facility, marketing to possible customers outside Alberta and attendance at a trade show. Development within Alberta of interactive digital media or video game products for commercial use. The Alberta Government provides examples of eligible products, including digital games, mobile applications, educational interactive media and video game software publishing. However, products that are developed for internal use, used primarily for interpersonal communications or to solicit funds would not be considered eligible. Development and delivery within Alberta of post-production services, including the development of visual effects and digital animation for commercial use and the editing of video and audio, subtitling, closed captioning and the creation and editing of visual and sound effects. Examples provided include music studio recording services, developing and printing commercial motion picture files, editing motion picture films, visual effects, photography and other video-related services. Ineligible business activities The AITC program will not support the following activities: Exploration or extraction of minerals or the operation of a mine. However, a small business that is substantially engaged in research and development of proprietary technologies, processes and products may still be eligible. Financial services, including loans, selling insurance or trading in securities. However, development of technologies that improve the offering of financial services is eligible. Agricultural activities other than non-traditional agriculture activities. Activities such as specialized small crops, livestock and poultry production, or high technology enterprises which are businesses involved in research and technology are eligible. Alberta s Venture Capital Tax Credit 2
Retail and commercial services, unless those services relate to the provision of services to tourists and the small business derives more than 50% of its gross revenue from the sale of the services to tourists. Restaurant or food services. Leases of tangible or intangible personal property. The Government of Alberta may exercise its own discretion in reaching a conclusion that the particular business activity meets the requirements of the prescribed regulations. Substantially engaged As noted above, for the corporation to be considered eligible, it must be substantially engaged in the eligible business activity. To be substantially engaged, more than 50% of the entity s assets and expenses must be used in Alberta for the eligible business activity. Also, the entity must have a permanent establishment in Alberta and more than 80% of its assets must be located in Alberta. The value of assets and expenses must be determined in accordance with generally accepted accounting principles. Venture Capital Corporation Tax Credit Registration To be eligible for the AITC, a VCC must apply to the Minister by completing a registration form. All necessary application forms are available at the Alberta investor tax credit website: https://www.alberta.ca/alberta-investor-tax-credit.aspx#toc-3. To register as a VCC, the following requirements must be satisfied: Must be incorporated or continued under the Alberta Business Corporations Act Must not have previously carried on any business Must have equity capital of at least $25,000 Only permitted to issue common shares with no special rights or restrictions, or common shares having special rights relating only to the redemption of the shares by the corporation Articles of incorporation must restrict the business of the corporation to making eligible investments in small businesses and providing business and managerial expertise to small businesses in which an eligible investment has been made Articles of incorporation must state that a majority of the directors of the corporation must be ordinarily resident in Alberta VCC must establish a permanent establishment in Canada within 30 days of being registered and must maintain a permanent establishment in Canada thereafter Eligible investments A VCC is able to make investments in small businesses that meet the following conditions: The business has no more than 100 employees At least 50% of the wages must be paid to employees who regularly report to work in Alberta for small businesses engaged in the export of goods or provision of services outside Alberta, and for all Alberta s Venture Capital Tax Credit 3
other small business at least 75% of the wages must be paid to employees who regularly report to work in Alberta The small business must be substantially engaged in the eligible business activities noted above Capital requirements To qualify as a VCC, certain equity capital and investment thresholds must be satisfied: At the end of its first year after registration, a VCC must have equity capital of at least $50,000. At least 40% of the equity capital of the VCC raised in any given year must be invested in eligible investments by the end of its following year, and at least 80% of the equity capital raised in any given year must be invested in eligible investments by the end of its second following year. The required capital must be invested in eligible investments for at least five years after the date of the applicable investment. Prohibited investments A VCC is prohibited from holding investments in small businesses under the following circumstances: VCC cannot hold an investment in a small business if it or affiliates would own, directly or indirectly, shares carrying 50% or more of the voting rights VCC cannot hold an investment in a small business where a major shareholder of the VCC was at any time during the two years preceding the investment a major shareholder of the small business or related to a major shareholder of the small business VCC cannot hold an investment in a small business if the small business or its shareholders has provided a loan, guarantee or any other financial assistance to the VCC or shareholders of the VCC VCC cannot make in an investment in a small business for an amount that exceeds $10 million VCC tax credit certificates The registered VCC must request tax credit certificates on behalf of its investors. The VCC will collect the appropriate information from the investor and complete the online Share Purchase Information Form. Once the application is accepted, the tax credit certificates will be issued to the VCC for distribution to its investors. Annual reporting A VCC is required to file an annual return with the Minister within six months after its fiscal year end that includes the following information: Amount of equity capital raised Aggregate value at cost of investments made Details of any investments disposed of, including the cost of the shares and name of the small business Balance in the investment protection account Aggregate amount of expenses incurred and amounts paid as management fees Alberta s Venture Capital Tax Credit 4
Details of any fees paid to the shareholders, officers or directors of the VCC by a small business in which the VCC has an eligible investment Notice of any amendments to the articles of the VCC Amount of all dividends received in respect of its eligible investments Details of any share redemptions of any of its shares and whether the redemption was reported to the Minister or not Details of any expenses paid to any person or group of persons who controlled the VCC Confirmation that the VCC notified the Minister of any prohibited investments held by the VCC Eligible business corporation investor tax credit Registration To be registered as an EBC, a small business must apply to the Minister by completing a registration form. All necessary application forms are available at the Alberta investor tax credit website https://www.alberta.ca/alberta-investor-tax-credit.aspx#toc-3. To register as an EBC, the following requirements must be satisfied: Small business must have no more than 100 employees At least 50% of the wages must be paid to employees who regularly report to work in Alberta for small businesses engaged in the export of goods or provision of services outside Alberta, and for all other small businesses at least 75% of the wages must be paid to employees who regularly report to work in Alberta The small business must be substantially engaged in the activities noted above Prohibited investments An eligible investor is prohibited from holding investments in small businesses under the following circumstances: Eligible investor cannot hold an investment in an EBC if the aggregate of all amounts received by the EBC from all eligible investors exceeds $5 million Eligible investor cannot hold an investment in an EBC if the eligible investor along with related persons own, directly or indirectly, shares carrying 50% or more of the voting rights EBC tax credit certificates Similar to the registered VCC, the EBC must request tax credit certificates on behalf of its investors. The EBC will collect the appropriate information from the investor and complete the online Share Purchase Information Form. Once the application is accepted, the tax credit certificates will be issued to the EBC for distribution to its investors. Alberta s Venture Capital Tax Credit 5
Annual reporting An EBC is required to file an annual return with the Minister within six months after its fiscal year end that includes the following information: Copy of securities register Copy of most recent financial statements that have been reviewed by a chartered professional accountant Copy of most recent annual return filed with the Registrar of Corporations Learn more For more information on the above measures or any other topics which may be of concern, please contact your EY or EY Law advisor or one of the following professionals: Dean Radomsky +1 403 206 5180 dean.w.radomsky@ca.ey.com Tom Flaig +1 403 206 5334 tom.flaig@ca.ey.com Alberta s Venture Capital Tax Credit 6
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