The Newfoundland and Labrador Direct Equity Tax Credit provides investors with a tax credit for their direct investment in eligible local businesses, effective October 30, 2000.
- Eligible Investors
- Eligible Investments
- Eligible Businesses
- Prohibited Use of Funds
- The Tax Credit
- Tax Credit Receipts
- Information Returns
The credit is available to individuals 19 years of age or older who are residents of Newfoundland and Labrador or otherwise paying income tax to the Province and corporations which operate at arm’s length from the eligible business.
The Province of Newfoundland and Labrador in no way guarantees the value of any shares issued by an eligible business. Nor does it in any way express an opinion as to the financial condition of the issuing company or the merits of an investment in shares of the issuing company.
Eligible investments are newly issued common voting shares of the corporation that are non-redeemable, non-convertible and not restricted in profit sharing or participation upon dissolution. The shares cannot be eligible for any other tax credit or deduction allowed under the Income Tax Act, except as a deduction for RRSP purposes. The shares must be fully paid for in cash.
In addition, shares are not eligible if the individual investor disposed of any shares of the eligible business at any time after March 22, 2000 and before the specified issue of shares. Shares purchased by a corporate investor are not eligible if that investor disposed of any shares of the eligible business at any time after March 27, 2003. The specified issue of shares refers to those shares that are specified in the business’ s application for a Certificate of Registration as an Eligible Business.
In order to qualify as an eligible business, a corporation shall:
- be a Canadian controlled corporation and not a publicly traded corporation;
- have a permanent establishment in Newfoundland and Labrador;
- have less than $20 million in assets, including associated corporations;
- utilize in the province all of the capital raised from the specified issuance;
- have no more than 50 full time equivalent positions;
- have at least $25,000 of either or both of shareholder equity and shareholder loans before applying for certification; and
- must be engaged in, and will utilize funds for, qualifying activities.
The program is targeted to small businesses engaged in growing areas of the economy, such as:
- research and development;
- forestry and agrifoods;
- manufacturing and processing;
- export / import replacement businesses;
- tourism; and
- cultural industries.
But not companies whose primary business is, or who intend to use funds raised under this program for, the following:
- food and beverage services;
- personal services, business services, professional practices and trades;
- real estate marketing and development;
- oil and gas development and production;
- mineral resource exploration;
- financial services;
- fish harvesting and primary fish processing (except processing of underutilised species as designated by the Minister); and
- any other activity which in the opinion of the Minister is not in keeping with the spirit and intent of this program.
Funds raised by the eligible business must be used in an active business and cannot be used for any of the following purposes:
- paying dividends;
- the purchase or redemption of shares;
- the payment of debt, debt reduction or refinancing an existing debt;
- the funding of the purchase of any part of a business as a going concern;
- the funding of the purchase of all or substantially all of the assets of a previously existing proprietorship, partnership, joint venture, trust or company, except where that firm is in receivership or bankruptcy; and
- the purchase of assets or services by the eligible business for a price greater than fair market value.
Targeting Outside North East Avalon
There are two tax credit rates. Where the qualifying activities are undertaken in the Province outside the North East Avalon, a 35% rate applies. Where the qualifying activities are undertaken within the North East Avalon, a 20% rate applies. Where qualifying activities are undertaken both inside and outside the North East Avalon, a reasonable pro-ration would apply. The North East Avalon includes Bauline, Conception Bay South, Flatrock, Logy Bay-Middle Cove-Outer Cove, Paradise, Petty Harbour, Portugal Cove-St Philip’s, Pouch Cove, Torbay, Mount Pearl and St. John’s. The location of the investor is not a consideration in determining the tax credit rate.
Company Fund Raising Limits
The maximum capital that any one eligible company may raise in respect to a particular offering or project, for which tax credits could be issued under this program, is $3,000,000.
Maximum Investor Credit
The maximum annual tax credit per eligible investor is $50,000. For individuals, the tax credit may be claimed in the year in which the eligible shares are purchased, or, if purchased within 60 days of a calendar year, may be claimed in the previous year. For eligible corporate investors, the tax credit would be claimed in the fiscal year in which the investor purchased the eligible shares. The credit is not refundable but may be carried forward for seven years or carried back three years, however, corporate investors can not carry back in fiscal years ending prior to April 1, 2004 and individuals can not carry back prior to the 2000 taxation year. The $50,000 maximum credit includes any carry forward (or back) amounts used in a given year.
Non Redeemable Period
Eligible businesses are not allowed to redeem eligible shares for five years after issuance. If shares are redeemed then the eligible business shall pay to the Minister a penalty equal to the tax credit allowed with respect to the shares, plus interest.
A business seeking eligibility must make application to the Department of Finance to obtain certification. This verifies that the specified shares are eligible for the tax credit. Pre-approval of eligibility is required. This eligibility does not constitute any approval that may be required from the Securities Commission of Newfoundland.
The following information should be included with the application:
- names and addresses of all directors of the applicant corporation;
- copy of the certificate of incorporation;
- financial statements for the most recent year end of the corporation and all associated corporations together with a review engagement report or auditor’s report;
- income tax returns and schedules for the preceding taxation year for the corporation and all associated corporations;
- the amount to be raised by the specified issue;
- detailed description of the proposed business activities;
- detailed description of the proposed use of funds raised;
- the proposed locations for the utilization of funds; and
- other information that the Minister may require.
The certification of a corporation shall be valid for a period of three months, unless that period is extended by the Minister. Only those shares which have been issued during this time period will be eligible for the tax credit. The total value of eligible shares shall not exceed the amount authorized under the certification.
Tax credit receipts will be issued by the Department of Finance upon receipt of appropriate documentation by the Eligible Business. The tax credit receipts must then be submitted with the investor’s T1 or T2 Income Tax return, as applicable, for the year.
Eligible businesses shall supply financial statements, as required by the Minister. These statements must include an independent auditor’s statement that the corporation is in good standing and that the specified share issuance meets all the requirements of the Direct Equity Tax Credit program. Upon request, eligible businesses shall supply information confirming the use or disposition of capital raised under the Direct Equity Tax Credit program, to ensure compliance with requirements such as qualifying business activities and prohibited uses of funds. Eligible businesses shall also provide a detailed status report of shareholdings for five years after specified share issuances and detailed information on the directors of the investing corporation.
- The Direct Equity Tax Credit Regulations (under the Income Tax Act)
For more information about corporate income taxes in Newfoundland and Labrador, please contact the Fiscal and Economic Policy Branch.