Leveraging the New Brunswick Small Business Investor Tax Credit to Raise Capital for Your Business
Securing necessary funding for a startup or a business expansion is often a challenging endeavor. It is common for founders to have aspirations that exceed their own access to capital. In turn, they must secure funding from other parties. The main sources of capital for small businesses come from lenders or investors, so small businesses often end up raising capital through a combination of debt and equity. Lenders usually have priority rights over investors, so investors ultimately take on more of the business risk.
Small Business Investor Tax Credit Program
To help reduce exposure for the investor and to help the founder attract investment money, the province of New Brunswick offers a generous tax incentive called the SBITC (short for Small Business Investor Tax Credit). The SBITC Program provides the investor with a non-refundable provincial tax credit that can be claimed on the investors tax return. What this means is that the tax credit can be used to offset or eliminate the investor’s provincial tax otherwise payable. If the tax credit exceeds the investor’s provincial tax payable for the current tax year, the remainder can be carried back up to three years or carried forward up to seven years.
Individuals may invest between $1,000 and $250,000 in any particular year and will receive a tax credit of 50% of the total investment, for a maximum tax credit of $125,000. Corporate investors need to invest at least $50,000 and up to a maximum of $500,000. However, the tax credit for corporate investors is equal to 15% of the total investment, for a maximum tax credit of $75,000.
To qualify for the tax credit, the rules of the program must be followed. The program defines eligibility requirements for the business seeking investment, the investor, and the characteristics of each investment. The main criteria are highlighted in the sections that follow. For the full set of criteria, readers should seek professional advice or refer to the SBITC website and the SBITC Act and Regulations.
The business must be a private corporation or a Community Economic Development Corporation (CEDC) incorporated or registered to conduct business in the province of New Brunswick. This includes most businesses in New Brunswick with the exception of those that are traded publicly or otherwise required to file a prospectus under the NB Securities Act.
As the name implies, the program is available to small businesses which the province defines as businesses with total net assets not exceeding $40 million. This test includes assets from any other businesses that the province considers associated to the business applying under the program. So with that, it’s not likely any Irving companies would qualify for the program.
The main business activity of the business must be to generate income essentially from the sale of products or services. More specifically, the business must use the majority of its assets to generate what the province refers to as active business income. In other words, businesses that are primarily engaged in property rentals or investment holdings are generally not eligible to apply under the SBITC Program.
Under the SBITC program, the business is required to pay at least 75% of total wages to New Brunswick residents. This requirement is lowered to 50% of total wages for those businesses that export more than 50% of their products and services outside the province. This satisfies the essence of the program which is to generate investment and to create jobs in New Brunswick.
The business must raise a minimum capital of $10,000 and there must be at least three investors involved in each capital raise. The shares purchased by the investor must be issued directly from the eligible business rather than purchased from another individual. The business must show a primary purpose for raising the capital other than to take advantage of the SBITC tax credit. If the Minister finds the later to be true, the application will be denied.
The investment shares must be fully paid for when issued and the eligible business must not provide any financial assistance to the potential investor. This means the eligible business may not advance loans, repay shareholder advances, or pay significant dividends to any potential investor before or during participation in the year SBITC program. It is acceptable however, for an eligible investor to be paid a reasonable salary for services performed.
The Minister will review the records of the eligible business and any associated businesses each year during the program to verify that such payments have not been made. The Minister will also look back 12 months prior to the date of application.
The investment shares must be no-par value shares which basically means the shares will participate in the growth in value of the eligible business. The basic premise here is that the investor participates in the growth in value of the business which also means the total investment, net of the tax credits received is at risk. The shares can be voting or non-voting, common or preferred.
The eligibility of the investor is fairly straightforward. Individuals must be at least 19 years of age and be a resident of New Brunswick. Corporate investors must be incorporated or registered to do business in the province of New Brunswick. The investor may not use any form of government financial assistance to pay for the investment. I would presume the onus is on the investor to prove the source of funds. Aside from that, the amount the investor can invest is restricted to the amounts as mentioned previously.
There are several steps involved in applying for the SBITC Program and a number of forms that need to be completed. First, the eligible business fills out an application which is available on the SBITC Program website. Existing businesses must submit three years of financial statements, reviewed or audited by a Chartered Professional Accountant (CPA) along with the income tax return for the most recent tax yearend. For startups, the business must submit pro forma financial statements.
The business must also submit an investment plan that explains the amount of capital to be raised and how the business intends to use those funds. The plan must identify each eligible investor along with the number of shares to be subscribed for and the amount to be paid. Other items that need to be disclosed include main business activities, percentage of assets used in each business activity, number of employees currently employed, total wages paid to residents of New Brunswick during the previous tax year, and the total value of goods and services exported outside the province.
Aside from the application process, it is important that the business has authorized an appropriate class of shares with certain share characteristics that meet the objectives of the business and its investors. Beyond the application process, participating businesses will need to file an annual report with the province which includes reviewed or audited financial statement for each yearend during SBITC Program which usually spans five yearends.
Any business considering applying under the SBITC Program should consult with their advisors to guide them through the entire process. For more information about the Small Business Investor Tax Credit Program and to access the required forms, refer to the following website: http://www2.gnb.ca/content/gnb/en/departments/finance/taxes/credit/program.html