In 1993, the Nova Scotia government enacted the Equity Tax Credit Act to encourage investment in Nova Scotia industry and business. The Act benefits both the investor and eligible business by providing a tax break to the investor and encouraging private funding of Nova Scotia industry. The program has grown in popularity and it is used by investors to gain additional benefits from the money they invest.
What the Act Does
The Equity Tax Credit Act provides each eligible investor with a tax credit based on the amount invested in an eligible business. The eligible business must use the funds in an eligible investment.
Three or more investors must invest in an eligible business. An eligible investor is a resident of Nova Scotia who is at least 19 years old. Residency is determined by whether the investor is required to pay income tax under the Income Tax Act (Nova Scotia) in the tax year in which the investor claims the tax credit.
As noted above, the purpose of the Equity Tax Credit Act is to encourage investment in Nova Scotia business, and several restrictions have been imposed. To be eligible a business must have its head office in Nova Scotia, pay at least 25% of all its wages in Nova Scotia, have less than $25,000,000 worth of assets and revenues, and be engaged in an active business (meaning at least 90% of the property and assets owned by the business is being used for commercial purposes) or hold shares of a corporation that would be an eligible business. Eligible businesses include corporations, community economic development corporations, co-operatives, associations, and labour-sponsored venture capital corporations; however, the tax credit is not available with respect to investments in a corporation or association incorporated for the professional practice of an accountant, dentist, lawyer, medical doctor, veterinarian, or chiropractor.
In return for the investment from eligible investors, the eligible business must issue to the eligible investors, non-redeemable, non-convertible, fully paid, voting common shares. The issued shares cannot be subject to any restrictions with respect to profit sharing or participation in receiving assets upon winding up the business. In addition, the investment cannot be eligible for any other tax credit or deduction, such as under the Income Tax Act (Canada). The only exception to this rule is the shares may be held in an RRSP.
The newly issued shares cannot be replacement shares. Replacement shares are shares that are sold to a shareholder who previously held shares in the company. According to the Act, a shareholder who disposed of any class of share of the particular company between September 30, 1993 and December 31, 2006 cannot be eligible to receive a tax credit under the Act if the shares purchased were purchased after disposing of the initial shares.
The investor must hold the newly issued shares for a period of at least 5 years. If the shares are disposed of before the expiry of the 5-year period, the investor may be required to repay all or a portion of the tax credit. The purpose of this provision of the Act is to promote long-term investment and discourage investment solely for the purpose of obtaining the tax break.
The investment funds may only be used for active business activities or to invest in shares of a corporation or association that would, if that corporation or association made application pursuant to the Act, be an eligible business. The investment funds cannot be used for lending, purchasing shares (other than shares in other eligible businesses), paying dividends or repaying shareholder debt to a director, shareholder or officer of the business (or their associates), for purchasing services or assets for activities carried on by the Province where the business has received public funding, the redemption of shares or the funding of the purchase of all or substantially all of the assets of a previously existing business (except where that business is in receivership or bankruptcy), or the purchase of assets or services by the eligible business for a price greater than fair market value.
Under the Act, the maximum annual investment for each investor is $50,000 and the tax credit is calculated at 35% of the investment. As a result, the maximum annual tax credit available to an investor is $17,500, or 35% of $50,000. The tax credit can be deducted from an individual’s personal provincial income tax.
An eligible investor may make an investment of more than $50,000 in one year; however, no tax credit will be given for the amount that exceeds $50,000. For example, if an eligible investor invests $200,000 in an eligible business in 2013, the only tax credit available for that year is $17,500 (35% of $50,000). No credit is available with respect to the remaining $150,000.
In order to minimize the effect of the $50,000 eligibility cap, investors may wish to consider spreading their investments over several calendar years. If the rules of the program are followed, this may allow each investor to receive a tax credit based on the full amount of the investment. For example, if an eligible investor wishes to invest $200,000, the investment could be spread over 4 years in order to obtain the maximum tax credit for each year ($50,000 invested per year, a resulting tax credit of $17,500 per year). It is essential, though, that the company renew its registration under the program.
If the full amount of a tax credit is not used in one year, the unused portion may be carried forward for seven years or back for three years.
The Equity Tax Credit Act was enacted to encourage investment in Nova Scotia businesses. The Department of Finance generally takes an open and flexible approach to the Act and to potential investors. The Act is designed to be used and the administrators will go as far as is reasonably possible to ensure that the tax credit is made available where possible.
This information has been provided for general reference only. For advice on an actual matter, you should consult a lawyer. To contact a member of our team call us at 902-469-9500 or 1-866-339-3400 or contact us online to make an appointment.