Frequently Asked Questions
The following information answers the most commonly asked questions about the B.C. small business venture capital tax credit program.
The Small Business Venture Capital Act (the “Act”) and the Small Business Venture Capital Regulation (the “Regulation”) is the governing legislation that guides the tax credit program and the answers provided are based upon the interpretation of this legislation.
Businesses that are substantially engaged in a qualifying activity, such as manufacturing and processing, development of clean technologies, destination tourism, advanced commercialization, development of an interactive digital media product and research and development of proprietary technologies are eligible to apply.
Consequently, the ministry looks at the core business activity as outlined in the business plan/executive summary provided as part of the registration package. The business must be substantially engaged (at least 50% of assets and expenses) in one or more of the qualifying activities, as outlined in section 11 of the Regulation.
Eligible business activities are outlined in section 11 of the Regulation. The kinds of companies that qualify under each activity are varied and situation specific. For further information on eligible activities, please contact the Investment Capital Branch at 1 800 665-6597 or via email at InvestmentCapital@gov.bc.ca, or see the policy statement Eligible Small Business and Eligible Business Corporation (PDF, 574 KB).
The most common error on EBC applications is incomplete information. For information or assistance on completing an application please contact the Investment Capital Branch at 1 800 665-6597 or via email at InvestmentCapital@gov.bc.ca.
Generally, registration applications and requests for additional equity are processed within 10 business days once all required information has been provided.
Yes, however one of the conditions for registration is that a company must have a minimum of $25,000 in equity capital. A convertible right is excluded from the $25,000 in equity capital.
Note: Equity capital received by the company prior to registration in the venture capital tax credit program is not eligible for tax credits.
Claiming Tax Credits
An individual or corporation that is required to file a B.C. tax return is eligible to claim a VCC or EBC tax credit.
Investments made directly from an investor’s RRSP or RRIF account are tax credit eligible. In addition investors may transfer investment shares purchased outside their RRSP, RRIF or TFSA directly into their RRSP, RRIF or TFSA account.
Investors are advised to contact their investment advisor or RRSP, RRIF and TFSA administrator to determine that tax credit eligible shares are a qualified investment for RRSP, RRIF and TFSA purposes.
Rules surrounding RRSPs and whether a share purchase is a qualified investment for RRSP purposes fall under Canada’s Income Tax Act, and are not a provincial responsibility. Investors are advised to contact their investment advisor or RRSP administrator to discuss the benefits of making an RRSP purchase from or transferring shares to an RRSP and to determine whether tax credit eligible shares are a qualified investment for RRSP purposes.
EBCs must submit an annual report, as outlined in section 28.97 of the Act, for a period of five years from the date of the last venture capital tax credit program supported investment.
EBCs are required to file the annual report within six months of their financial year end including: financial statements that have been reviewed by a Certified Professional Accountant or other person who is a licensed or registered member of an accounting association; a copy of an up-to-date central securities register; and a copy of the most recent annual report filed with the registrar of companies.
Note: EBCs that have raised less than $500,000 under the venture capital tax credit program may submit “notice to reader” financial statements, while EBCs that have raised $500,000 or more are required to submit “review engagement” financial statements.
EBCs are also responsible for entering investor/investment information into the electronic tax credit application system (eTCA), providing additional required documentation related to investment if required, and distributing tax credit certificates to investors.
Note: For each investment of $175,000 or more, the ministry requires extra due diligence before releasing tax credit certificates. The EBC is required to submit share purchase reports, bank statements, and a central securities register as confirmation that the investment occurred.
Annual returns are due within six months of the VCC's or EBC's fiscal year-end.
All companies applying to be registered as an EBC under the venture capital tax credit program must have at least $25,000 in equity capital. Shares must be issued from the company treasury and paid for in cash. Alternately, shareholder loans converted into equity shares prior to registration also satisfy the $25,000 equity capital requirement.
The ministry requires applicants to submit a central securities register and may require bank statements to confirm that the business has issued at least $25,000 of equity shares prior to registration. A convertible right is not eligible for the initial $25,000 in equity capital.
Note: The initial $25,000 in equity capital is not eligible for tax credits.
The Act defines "equity capital" as the consideration in money received by a company before or after its registration under this Act as a VCC for its issued shares or by a small business for its issued "equity shares". Equity shares are defined as:
- a share of a class of shares whether or not the share carries voting rights, but does not include a share having prescribed rights and restrictions
- any warrants, options or rights entitling their holders to purchase or acquire the shares referred to in paragraph (a)
- a convertible right (SAFE) entitling the holder to receive shares in the future without the holder paying any further amount for the shares
- other prescribed securities
Generally, companies are affiliated if they are in a parent/subsidiary relationship or are sister companies under common control. Specifically, affiliate means any corporation where one is the subsidiary of the other, or both are subsidiaries of the same corporation. Two corporations are also affiliates if both are controlled by the same person or group of person; or if one corporation is controlled by a person and the other corporation is controlled by their spouse, parent, grandparent, sibling, child or other their spouse’s relative.
Generally, two people are associates if they are related. Your associates include your spouse, parents, grandparents, children, grandchildren, and siblings. Your spouse's parents, grandparents, children, grandchildren, and siblings are also your associates if they live with you.
Associates can also be your business partners and those people who participate in a joint venture with you.
A corporation can be your associate if you own, directly or indirectly, shares carrying more 10% or more of the outstanding voting rights for the election of the company’s directors.
Likewise, a trust or estate can be your associate if you serve as a trustee (or in a similar capacity), or have a substantial beneficial interest in the trust or estate.
Employees are individuals who report for work for the small businesses, and include all "persons engaged by a small business". This includes the officers of the small business and persons who work for or provide services to the small business who are employed through a temporary help service.
Contractors are not considered employees. British Columbia based contractors working to support the EBC’s qualifying activity are considered an eligible expense. Contractors who are not British Columbia based or do not support the EBC’s qualifying activity are considered an ineligible expense.
The number of employees may be calculated using either of the following formulas:
Number of Employees = Total Hours / (40 x w)
Total Hours = total hours worked by all employees each of whom worked for at least 20 hours (counting all time worked by each employee whether for the small business, any of its affiliates or both) during any week of the calculation period, and
w = number of weeks in the calculation period
Number of Employees = [(Employee Costs x 52) / w] / $45,000
Employee Costs = all amounts paid or payable by the small business to or on behalf of employees for work performed or services provided by them during the calculation period
w = number of weeks in the calculation period.
Note: If the small business has any corporate "affiliates" (as defined in the Act), the number of employees of the small business together with its affiliates, is the sum of the number of employees of the small business and each of its affiliates, calculated using the above formulas.
Percentage of wages and salaries = (Wages (B.C.) / Total Wages) x 100
Wages (B.C.) = total remuneration paid, payable or to be paid in respect of the calculation period to employees of the corporation who regularly reported to work during the calculation period at operations located in British Columbia
Total Wages = total remuneration that was paid, payable or to be paid in respect of the calculation period to all employees of the corporation during the calculation period.
The calculation period used to determine the number of employees or percentage of wages paid to employees who regularly report to work in British Columbia is either:
- where, at the date of the calculation, a corporation has been in business for a period of less than 12 consecutive months, that entire period.
- where, at the date of the calculation, a corporation has been in business for a period of 12 or more consecutive months, the 52 weeks just ended at the date of the calculation.
Generally, the qualifying activities must represent the majority of the business' total activity.
To be substantially engaged, more than 50 percent of the assets and expenses of the business are used in (or more than 50 percent of the business revenue is derived from) one or more of the prescribed qualifying activities.
(Activity Assets + Activity Expenses) / (Total Assets + Total Expenses) > 0.5
Activity Assets = value of assets of the small business used in B.C. in the prescribed business activity
Total Assets = total value of all assets of the small business
Activity Expenses = expenses of the small business incurred during the calculation period with respect to the portion of the prescribed business activity carried on in B.C.
Total Expenses = total of all expenses of the small business incurred during the calculation period with respect to all operations of the small business.
Note: The value of assets and expenses must be determined in accordance with generally accepted accounting principles.
XYZ Co. is a family business that grows and harvests specialty timber from its private lands (40% of assets/expenses), mills and processes the lumber into furniture (51% of assets/expenses) and has a small factory direct retail outlet (9% of assets/expenses). Even though the business is engaged in "manufacturing and processing" which is a prescribed activity, the primary resource extraction and retailing portions of its operations are specifically not prescribed activities.
Therefore, the harvesting and retailing assets and expenses could not be included in the numerator of the above formula. Even so, the business would still be "substantially engaged" in prescribed business activities because 51% of its assets and expenses are applied to manufacturing and processing activities.
An investor cannot receive tax credits if they own, either individually or collectively with associates and affiliates, 50% or more of the votes for the election of directors of the EBC.
Only issued and outstanding shares with voting rights are used to determine if an investor, either alone or with associates and affiliates, owns 50% or more of the votes for the election of directors.
Yes. A convertible right (SAFE) investment is eligible for tax credits at the time the investment is made in the EBC.
Yes. A VCC’s investment in a convertible right (SAFE) issued by an eligible small business is an eligible investment for a VCC at the time the investment is made in the eligible small business. The VCC’s investment in a convertible right (SAFE) counts towards the VCC’s five-year hold (pacing requirements).
Note: A VCC may not issue a convertible right.
Yes, however, due to the potential large number of smaller investments sourced through crowd-funding, the EBC may be subject to significant additional administrative requirements and costs related to administering the venture capital tax credit program on behalf of their investors.
Yes, in fact many venture capital tax credit program applicants and registrants are also enrolled in the Industrial Research Assistance (IRAP) and Scientific Research and Experimental Development (SH&ED) programs. EBCs participating in the venture capital tax credit program may also claim the Interactive Digital Media Tax Credit offered by the province.