Manitoba’s Small Business Venture Capital Tax Credit Extended to 2019
Manitoba’s small business venture capital tax credit is a generous nonrefundable credit for accredited investors who invest in emerging enterprises, which was introduced in the 2016 provincial budget, and extended until December 31st, 2019.
Eligible Issuers and Qualifying Shares
To issue shares that qualify for the SBVC tax credit, businesses must be Canadian-controlled corporations with at least $25,000 in stated capital. They must not have more than 100 full-time employees, and at least a quarter of their workforce must live in Manitoba. Businesses in some industries may not issue these types of shares; the government of Manitoba maintains a list of ineligible businesses, including restaurants, lounge bars, doctors clinics and gaming activities. As of 2015, brew pubs and non-traditional farming ventures have been removed from the ineligible list, increasing opportunities for investors.
Businesses that meet these criteria may apply to the SBVC Tax Credit Program. If approved, they must issue a minimum of $100,000 in equity shares per year but may not exceed the $10 million maximum. At the end of the year, these business must send SBVC tax credit receipts to their investors so the investors may claim this credit on their tax returns.
The shares must be new common or preferred shares, and they cannot be redeemed or sold during the holding period, which lasts three years from the issuance date. If an investor sells shares before the three-year holding period ends, the investor will be assessed a tax equal to the value of this credit.
To claim the SBVC tax credit, you must be an accredited investor who has signed an acknowledgement of risk form. Additionally, you must not have been a specified shareholder in the company that issued the shares at any point during the 24 months prior to purchasing the shares.
A specified shareholder is someone who holds more than 35% of a company’s issued shares. However, this rule only applies to shares issued on or after June 12, 2014. If you want to claim the credit on shares issued before that date, you must have less than 10% equity in the.company to be eligible.
Additionally, investors must not be prescribed venture capital corporations or prescribed labour-sponsored venture capital corporations. Investors must make a minimum investment of $20,000, but they cannot invest more than $450,000 in a single company.
Amount of the SBVC Tax Credit
For shares issued after June 11, 2014, the SBVC tax credit is 45% of the eligible investment. For example, if you make an eligible investment of $40,000, your tax credit is $18,000. As investors may invest up to $450,000, the maximum credit you may earn is $202,500. However, you may only claim up to $67,500 per year. You can roll these credits forward 10 years or backward three years.
To explain, imagine you invested $300,000 in eligible shares. When you multiply this figure by 45%, the result is $135,000. If you claim the maximum annual credit of $67,500, you can use the remaining $67,500 to offset income tax on a future or past return. However, you only owe $50,000 in provincial income tax in the current tax year. As a result, you don’t claim the maximum credit. Instead, you claim a $50,000 credit, and you save the remaining $85,000 to use on another return.
For shares issued before June 12, 2014, you receive a 30% tax credit. For example, if you buy $40,000 in qualifying shares, you receive a $12,000 credit. During this time period, the maximum amount you are allowed to invest in a single company is still $450,000, and that makes the maximum credit for shares purchased before this date $135,000. However, for tax years ending before this date, you may only claim a maximum $45,000 credit per year.
How to Claim the SBVC Tax Credit
To claim the credit, you need a SBVC tax credit receipt and Schedule 387 (Manitoba Small Business Venture Capital Tax Credit). This schedule helps you figure out the amount of your credit. If you need to carry a portion of your credit forward or backward, this schedule guides you through that process as well. If you have unused credits from a previous tax year, this schedule takes those into account, and it has formulas to ensure that you don’t claim expired credits.
Include this schedule when you remit your T2 corporation income tax return to the Canada Revenue Agency. If you are mailing your return, also attach your SBVC tax credit receipt to your return. If you are filing your electronically, save your receipt with your records.
Canadian Tax Expert @ TurboTax. Former CRA employee.