- What is Venture Capital?
- Why are tax credits needed to encourage investors to put their money into these ventures?
- What is the Venture Capital Tax Credit?
- What business activities qualify under the program?
- Are there any prohibited business activities?
- What is a “Qualifying Small Business”?
- Are there any prohibited uses of funds?
- Is it fair to assume that eligible companies under this government tax credit program should be safe investments?
1. What is Venture Capital?
Venture capital is money put up by investors to fund a new company or an expansion of an established company. The investor’s money is used as equity by the company to grow the business and eventually to provide a return or profit to the investor. Venture capital is usually very “patient” money where investors are prepared to leave it in the company for a considerable period of time to give the company a chance to grow and succeed.
2. Why are tax credits needed to encourage investors to put their money into these ventures?
The start-up of a new business or an expansion of an existing one is often risky, especially for small businesses in emerging areas of the economy. Entrepreneurs often have difficulty finding the capital they need to get their businesses up and running or expand them as they start to grow. Tax credits help reduce financial risk to investors and thereby provide an incentive for them to put their money into companies that are in need of start-up or expansion funds.
3. What is the Venture Capital Tax Credit?
The Venture Capital Tax Credit Program (VCTC) is a provincial non-refundable tax credit available for both individual and corporate investors, but not trusts, equal to 30% of the amount invested in the qualifying venture capital fund (QVCF) through the purchase of limited partnership units or newly issued shares.
- The maximum lifetime investment in the QVCF by each investor would be limited to $250,000, resulting in a maximum tax credit of $75,000 to be applied against provincial income tax that is otherwise payable.
- Unused credit can be carried back 3 years and forward 7 years until the full amount of the credit has been used or the time expired. However, you cannot claim any credit in a year before 2014.
- Eligible investment for RRSP contribution.
- Shares must be held for a minimum 5 years or the tax credit has to be repaid in proportion to the amount of time the shares were held.
4. What business activities qualify under the program?
Qualifying business activities include intellectual property, information technology, clean, ocean and marine technologies, life sciences and new media sectors and manufacturing and processing of value-added goods for export.
5. Are there any prohibited business activities?
Yes. Prohibited business activities include:
- Wholesale and retail trade;
- Food establishments or establishments that hold a licence issued under the Liquor Licensing Regulations;
- Personal services, business services, professional practices and trades, unless all or substantially all of those services relate to export related activities that the minister may determine;
- Real estate marketing and development;
- Oil and gas development and production;
- Mineral resource exploration;
- Financial services;
- Fish harvesting and primary fish processing; or
- An activity that, in the opinion of the Minister of Finance, is not in keeping with the spirit or intent of the VCTC program.
6. What is a “Qualifying Small Business”?
A qualifying small business:
- Must be incorporated and have at least 80% of its assets located in the province,
- Must have no more than 100 current full-time equivalent positions (for the corporation, including associated corporations and affiliates) and at least 75% of wages and salaries are paid to employees who report for work in the province, and
- Must have equity capital less than $10 million, including follow-on investments.
Eligible shares include both common and preferred shares however, no more than 20% of the qualifying venture capital fund’s portfolio may be held in debt.
7. Are there any prohibited uses of funds?
Yes. There are a number of prohibited uses of funds. These uses would include:
- Investing outside the province unless the investment is incidental or ancillary;
- Investing in land, unless the investment is incidental or ancillary;
- Acquiring securities other than equity shares from an affiliate of a qualifying small business, or units of a limited partnership;
- Purchasing goods or services from the qualifying venture capital fund, a director, officer, shareholder or partner of the qualifying venture capital fund, or an associate of a director, officer, shareholder or partner of the qualifying venture capital fund;
- Payment of all or part of a debt obligation unless the payment is incidental or ancillary;
- As part of a transaction or series of transactions directly or indirectly involving any of the following:
- The payment of dividends, and
- The funding of all or part of the purchase by the qualifying small business of any of the assets of a proprietorship, partnership, joint venture, trust or corporation at a price that is greater than the fair market value of the asset purchased.
8. Is it fair to assume that eligible companies under this government tax credit program should be safe investments?
No. The Province of Newfoundland and Labrador in no way guarantees the value of any shares issued by a qualifying business under the VCTC program nor does it in any way express an opinion as to the financial condition of the issuing company or the merits of any investments made under the program.
For more information, please contact:
P.O. Box 8700
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