British Columbia, like a number of other Canadian provinces (including Manitoba, Alberta, Newfoundland and Labrador, and Nova Scotia), has established a venture capital tax credit program to encourage investment in certain targeted industries. In British Columbia this program has now been made available to co-operatives. This development makes us wonder whether it would also be possible for co-operatives in other provinces to qualify under their regimes, if they do not already qualify.
These tax credit programs are intended to support capital raising by start-ups and to create jobs. Typically, investors may participate through a venture capital corporation (which in turn invests in qualifying small businesses) or, in some programs, by investing directly in an eligible business. Starting or expanding a small business involves risk to investors, and this can make it difficult for entrepreneurs to raise the capital they need to develop their businesses. Tax credits help to reduce the financial risk to investors, and thereby make it easier for small businesses to raise needed capital.
In British Columbia, the program is governed by the Small Business Venture Capital Act (the “Act”), and administered by the Investment Capital Branch of the provincial Ministry of Jobs, Trade and Technology. Until recently the Investment Capital Branch took the position that a co-operative was not eligible to be registered as an “eligible business corporation” under the Act, which meant that investors in co-operatives were not able to take advantage of the tax credits available under the Act. Miller Thomson lawyers worked with a co-operative to successfully demonstrate to the Investment Capital Branch that the Act was applicable to co-operatives as much as it was applicable to companies incorporated under the Business Corporations Act (British Columbia). As a result, our client became the first BC co-operative to be accepted as an “eligible business corporation” under the Act. This means that it can receive investments from venture capital corporations, and investors who purchase investment shares in the co-operative can apply for a 30% tax credit on their investment.
A cooperative seeking registration would still have to satisfy the other requirements under the Act by being substantially engaged in a qualifying activity, being ‘substantially engaged’ requires that at least 50% of the co-operative’s assets and expenses relate to a qualifying activity. Qualifying activities include manufacturing and processing of goods, tourism in certain regions, research and development of technology, certain types of interactive digital media production, research and development of clean technologies, and activities in rural areas promoting community diversification. These restrictions on activities are intended to direct investment to business sectors that diversify the economy of British Columbia.
The investment must be in shares and must be at risk of loss on, and return of, capital invested. Investors (individuals and corporations) must also be BC-based and cannot control the cooperative in any manner. As co-operatives operate on the basis that each shareholder has one vote regardless of the number of shares held, investors in co-operatives can still benefit from investment tax credits even if they hold a majority of shares in the co-operative.
Additional requirements for eligible business corporations include having equity capital of at least $25,000, having no more than 100 employees at the time of an initial investment by a venture capital corporation or direct investor, and paying at least 75% of its wages and salaries to employees in British Columbia.
The recognition that a co-operative can be registered under the Act represents a significant breakthrough for BC co-operatives, which can now benefit from this program in the same way as other incorporated businesses.
If you are considering using the co-operative structure for a small business, Miller Thomson lawyers can assist you with all legal aspects of incorporation, organization and financing. Miller Thomson has extensive experience advising co-operatives, as well as other types of business structures such as partnerships and companies. Miller Thomson lawyers can also advise you on the requirements for applicable investment tax credit programs in your province, and can help you establish business structures that will enable investors in your business to take advantage of these incentives to invest. If you are in British Columbia, or another province with a similar program, and wonder whether you qualify for tax credits, we would be pleased to assist with advice on this issue.