Optimism Surrounds the Alberta Investor Tax Credit
The Alberta Investor Tax Credit (“AITC”) program offers a new opportunity for investors to help foster economic growth and create jobs in non-traditional sectors within Alberta. There has been a growing demand for this type of incentive program, and the AITC is the Alberta government’s first step towards attracting investments into new industries outside of the oil and gas sector.
The AITCcame into force January 1, 2017, through Bill 30: Investing in a Diversified Alberta Economy Act (the "Act"), to provide a 30% tax credit for allowable investments in qualified small businesses. The Alberta government allocated $90 million to the program over its initial three-year term, ending in 2019, available on a first-come, first serve basis until the budgeted amount for the year has been fully allocated.
Both individuals and corporations are eligible to obtain tax credits through their investments under the AITC. For individuals, the AITC is a refundable tax credit which can result in a cash refund up to $60,000 annually. For corporations, the AITC is a non-refundable tax credit with no maximum credit in place. Any unused portion of the credit can be carried forward by a corporation for up to four years. Investments made as of April 14, 2016 may be retroactively eligible for the AITC.
The first type of eligible corporation under the AITC program is classified as an “eligible business corporation” ("EBC"). Generally, an EBC is a small business carrying on one of the following activities:
- research, development or commercialization of new proprietary technologies, products or processes;
- creating interactive digital media, animation or video game development, digital animation;
- tourism; or
- specialized or high technology agriculture activities.
EBC's must also meet the following criteria:
- restrict remuneration paid to any shareholder, director or officer (except by way of an annual ordinary resolution which typically requires an amendment to the corporation’s constating documents);
- have fewer than 100 employees according to a prescribed calculation;
- pay at least 50% of wages to employees in Alberta (if engaged in the export of goods or provision of services outside of Alberta) or 75% otherwise;
- have not received an investment from the Alberta Enterprise Corporation;
- conduct at least 50% of its business in a prescribed business activity in Alberta;
- up to $5 million in direct investments can be raised from individual and corporate investors; and
- maintain at least 80% of its assets in Alberta.
For those planning on investing in an EBC, the AITC is restricted to investments in “equity shares” (as defined in the Act). It is important to note that the equity shares must be fully paid for in cash. Additionally, the Act requires an investor to repay the credit it receives under the AITC program if it sells or otherwise redeems the shares of the EBC within five years of acquiring the shares, subject to certain exceptions.
The second type of eligible corporation under the AITC program is known as a “venture capital corporation” (“VCC”). A VCC is an entity that invests in an EBC or a small business corporation that is substantially engaged in one of the above-mentioned eligible business activities. Once the VCC receives approval from the government, it will have a limited period of time to find a suitable investment. To register before potential acceptance by the Alberta government, a VCC must:
- be incorporated under the Business Corporations Act (Alberta);
- have equity capital of at least $25,000;
- have certain prescribed provisions in its Articles (as set out in the Act and Regulations);
- have share capital that includes common shares; and
- not have previously carried on business.
Compared to EBCs, it appears easier for a VCC to receive an allocation (remember, the allocation is made on a case-by-case basis). However, there are still restrictive rules in place on VCC’s subject to the Act.
The benefits of the AITC program are expected to further increase when the Federal government updates the Regulations to the Income Tax Act (Canada) to provide VCCs with the same favourable tax treatment as similar programs in other provinces (see, for example, the British Columbia “Small Business Venture Capital Tax Credit”). If this occurs, the AITC will not reduce the cost base of the purchased shares, unlike flow-through shares.
While the efficiency of the implementation and administration of the program by the Alberta government is relatively unknown, investors should feel optimistic that the government is taking a proactive step in a new direction to diversify the Alberta economy.
Invitation for Discussion:
If you would like to discuss this article in greater detail, or any other business law matter, please do not hesitate to contact one of the lawyers in the tax and corporate law groups at Shea Nerland LLP.
Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.