Eligible Business Corporation Tax Credits: When Will They Need To Be Repaid?
Since 2003, BC investors that have invested in “eligible business corporations” have been eligible to receive a 30% tax credit for such investment, up to a maximum of $60,000 in tax credits each year.
At Fasken Martineau DuMoulin LLP, we see daily evidence of the important role this program plays in attracting risk capital to emerging technology businesses.
In fact, at this time of year we often see financings being driven almost exclusively by the rush to get eligible investments registered for tax credits before the budget runs out (and it has run out for this tax year in most cases, unfortunately).
Briefly, “eligible business corporations” (“EBCs”) are defined as British Columbia or Federal corporations that participate in one of six qualifying activities: (1) manufacturing, processing or export of value-added goods produced in British Columbia; (2) destination tourism; (3) research and development of proprietary technology; (4) development of interactive digital new media product; (5) community diversification outside of the GVRD and the CRD; or (6) clean technology. There are certain asset and expense requirements that are strictly applied.
The process is straightforward and the Investment Capital Branch (the “ICB”) is quite friendly and helpful to both companies and investors. Since I am a lawyer, I still feel obligated to recommend that you obtain professional advice to ensure that you comply with the requirements of the Small Business Venture Capital Act and its Regulations.
A company registers with the Investment Capital Branch, it obtains an approval from the ICB as to the maximum investment it can receive that is eligible for tax credits in that year, and it is off to the races. Other than certain annual reporting and authorization requirements, the process of maintaining eligibility is usually not onerous.
Despite the popularity of this program, we find that many companies and investors are unaware of the repayment obligations that sometimes arise with these tax credits. These repayment obligations can be triggered by either the investor or the company.
One example of an investor causing a repayment obligation is when they go to transfer their shares. If the shares held in an EBC by an investor are transferred or otherwise sold to a third party in the 5 years following the investment, the investor must repay the entire tax credit amount to the government. Practically, this create unique disincentives for larger angel investors to agree to a company sale in the months leading up to this deadline. We have even seen instances where the shareholders successfully lobbied to have closing pushed by a few months to avoid this repayment! Founders should be aware of this timeline, especially if it happens to fall near a potential exit. Here, the investor themselves are liable to repay the money.
One example of the company causing a repayment obligation is when its business transitions out of the Province within the 5 years following investments for which tax credits were received. Among the many requirements imposed on an EBC, it must be substantially engaged in one of the six permitted activities listed above in British Columbia and at least three-quarters of the EBC’s employees, calculated based on aggregate salary and wages, must regularly report to work in British Columbia. It is not uncommon for a company to first find funding from BC angel investors and then, perhaps as a function of greater opportunity and greater access to employees and capital in the United States, find itself transitioning south of the border. Here, the company is liable to repay the money.
In certain cases, directors, officers and even shareholders may be responsible to repay the entire tax credit liability, depending on their actions in contributing to the cause for repayment.
It is important that founders and investors are aware of these ongoing issues and plan appropriately in the event they encounter a tax credit repayment obligation. Thankfully, there are public resources available to founders and investors to assist in understanding these concepts. In particular, the Province’s website is a good starting point.