Incentive Investment Capital Programs

PART I

This is the first installment of the paper.  It contains short description of each program and appendix with definitions that will be required for the entire paper.

These programs offer tax credits to investors in small businesses in British Columbia (“BC”):

Venture Capital Programs

Provincial Venture Capital Programs encourage investments in BC businesses by providing BC investors with a 30% provincial income tax credit for maximum of $120,000 starting 2019 and following years.  The investment may be made directly into the Eligible Business Corporation (as described later) or indirectly (portfolio) into Venture Capital Corporation (as described later), which then invests in a number of Eligible Business Corporations.

Employee Share Ownership Programs

Employee Share Ownership Program promotes investment by employees in their company by providing them with a 20% provincial income tax credit (max of $2,000 a year).  Retiring business owners can use an employee share ownership plan to transfer ownership of their company to employees by selling shares directly to their employees, who receive a 20% provincial income tax credit on their investment.

Labor Sponsored Funds Program

The Program helps create investment funds that are able to invest in small and medium-sized businesses with high growth potential that need equity financing to achieve success.

These programs can be grouped differently by the type of investment, direct and portfolio investments: direct investment – Eligible Business Corporation and Employee Share Ownership Program, and portfolio investment – Venture Capital Corporation and Labor Sponsored Funds Program.

QUALIFIED ACTIVITIES

To be substantially engaged, more than 50 % of the assets and expenses of the business are used in (or more than 50% of the business revenue is derived from) one or more of the prescribed qualifying activities.

 

Formula:      Activity Assets   +   Activity Expenses     >   0.5

                      Total Assets     +    Total Expenses

Where,

• Activity Assetsmean the value of assets of the small business used in BC in the prescribed business activity;
• Total Assetsmean the total value of all assets of the small business;
• Activity Expenses mean the expenses of the small business incurred during the calculation period with respect to the portion of the prescribed business activity carried on in BC;
• Total Expenses mean the total of all expenses of the small business incurred during the calculation period with respect to all operations of the small business.

Additionally, the small business must be located in BC with not more than 20% of the small business’ assets located outside of BC (as determined under the Income Tax Act (Canada)). The value of assets and expenses must be determined in accordance with generally accepted accounting principles.

Manufacturing, processing or export of value-added goods produced in BC 

Manufacturing and processing are considered to be activities that consist of producing, or putting goods or materials into marketable form by employees of the small business, from raw, unfinished or prepared goods or materials, by changing the form or content of those goods or materials into a finished product.  Goods not wholly produced in BC will be deemed to be goods produced in BC if the Administrator is satisfied that substantial value has been added by the business’ operations in the Province.

Destination tourism 

To qualify under this activity, a business must demonstrate that it does or will earn 50% or more of its gross revenues from tourists.  A “tourist” is an individual who resides more than 80 kilometers from the destination resort or attraction.  The following activities are included:

• The development and operation of a destination tourist resort (fishing lodge, ski resort lodge or a guest ranch) that is:
  • a resort having an accommodation facility, a restaurant, and a facility providing recreational activity operating that operate concurrently for at least 120 consecutive days a year, and
  • located outside of the Greater Vancouver Regional District, the Capital Regional District and the Municipality of Whistler.
• The development and operation of a tourist attraction that is:
  • located outside of the Greater Vancouver Regional District, the Capital Regional District and, the Municipality of Whistler; and
  • a facility intended to attract and provide recreation to tourists on a fee for service basis; but not including the operation of:
    • motion picture or drive in theatre;
    • video or electronic game parlor;
    • bowling alley, ice rink, health club, racquet club or playing field;
    • night club; or
    • a facility that is restricted to members;
• The development and operation of a tourist service is:
• • a charter service that provides the service of hiring of vehicles, boats or aircraft for tourists and is not licensed as a common carrier for scheduled passenger services; or,
  • a tour operator or service registered under the Travel Agents Act that provides, for one price, vacation packages consisting of accommodation and recreation with the province of BC.

Research and development of proprietary technology

This category covers business activities involving research and development of proprietary technologies produced in BC, including services associated with marketing or exporting the technologies inside or outside the province.

Some industry sectors included under this activity are:

• Life sciences;
• Information & communication technology;
• Alternative Energy development;
• Environmental technology

A proprietary or “ownership” right to the technology is critical for qualification under this category because it enables the business to commercially exploit the technology and direct its research and development.

Services that support the export of proprietary technologies developed in BC include:

• Marketing the technology to clients outside BC,
• Attendance at international trade shows, or
• The operation of a demonstration or prototype facility.

Development of interactive digital new media product

In order to access tax credits reserved for the new media sector a small business must be substantially engaged in the development, within BC, of an interactive digital media product for commercial exploitation, that:

• Educates, informs or entertains and presents information using at least two of the mediums of text, sound or visual images;
• It is not developed for internal corporate use involving the promotion of products or services;
• It is not used primarily for interpersonal communication; and
• It is not a product for which public financial support would, in the opinion of the Administrator, be contrary to public policy.

A company may still qualify under this category if it is developing a product under contract for a third-party client.  However, the product must be developed in BC and the business developing the product under contract must still meet the remaining eligibility requirements.

An activity will not be considered eligible if it involves the development of a product that is contrary to public policy.  Examples of content that would be considered “contrary to public policy” include product that:

• incites hatred against an identifiable group, or
• has a dominant characteristic which is the undue exploitation of
  • sex,
  • violence involving one or more crime,
  • horror, or
  • cruelty.

Community diversification outside of the Lower Mainland and the Capital Region 

A business located outside the Greater Vancouver Regional District and the Capital Regional District may be engaged in a prescribed activity if the business activity promotes economic diversification within the region.  In assessing community diversification, consideration will be given to:

• the impact of the business activity on existing businesses in the region, and
• how the business activity supports or will support existing businesses in the community.

An activity that involves a ‘commercial service’ or ‘community infrastructure project,’ such as a technology ‘incubator’ center may qualify under this activity if it can be demonstrated that the activity supports the economic diversification and development of a community.

Example:

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.