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Alberta Investor Tax Credit
Solving the Venture Capital Draught
Issue
The inaccessibility of early-stage capital investment is a major impediment to the growth and
sustainability of Alberta’s small businesses. Often lacking the resources and administrative
capacity to raise capital via debt financing, these businesses rely heavily on equity investments
made by angel investors and venture capital firms. Despite this need, Alberta is currently one of
the only provinces in Canada without an income tax credit for those who invest in local small
businesses.1 The province lacks an incentive structure aimed specifically at encouraging private
sector agents to purchase equity in local—capital starved—enterprises.
Without policies that foster small business growth, the province’s productivity, level of
innovation, and overall competitiveness stand to suffer.
Background
With In their 2013 Report on Competitiveness, the Alberta Economic Development Authority
identified key competitiveness indicators, and compared the province’s performance against
other jurisdictions—both within Canada and abroad. The report found that one of the greatest
obstacles to the provinces’ overall competitiveness was a lack of access to venture capital. In
the report, Alberta was ranked near last in terms of both venture capital investment relative to
GDP, as well as the number of venture capital deals per 100,000 people. Venture capital is vital
in the development of innovative companies within the province. This inability is intrinsically
1
http://acca.coop/wp-content/uploads/2014/02/Coop-Development-White-Paper-May-5-20111.pdf
linked to Alberta’s other low scores in non-resource export growth, employment in high-tech
manufacturing, and employment in knowledge-intensive services.2
Increased business investment also contributes to the overall macro-economic health of the
economy. In their Monetary Policy Report: October 2014, the Bank of Canada identified weak
business investment as a major economic risk factor. The report outlined the economy’s over
reliance on household spending, and the need to shift toward business investment as a key
driver of growth.3 Therefore, policies must be developed to encourage investment when
individuals or corporations would otherwise save, or consume non-capital goods.
Currently, provincial programs have focused mainly on the demand-side of the business
development equation. Through the Alberta Innovation Voucher program and support in R&D
funding, there has been an attempt to spur the creation of new businesses and start-ups. These
programs are important for creating investment ready businesses,4 but more must be done in
encouraging private sector investment to help these ventures move forward. Early stage equity
investment is a necessary component in allowing small businesses to grow and become
sustainable enterprises.
Enterprise Alberta is one body which provides public funding to such ventures. Yet, a
sustainable ecosystem for small business investment in Alberta is not possible without greater
private sector involvement. New businesses backed in large part by public venture capital tend
to underperform compared to those funded by private investors, both in terms of patent
production and the likelihood of a successful market exit via an IPO or third party acquisition.5
However, due to the government’s unique ability to provide funding to companies whose societal
benefits may not be realized in the free market, there is still a role for public sector investment.
Econometric studies out of the University of British Columbia and Shanghai Advance Institute of
Finance have shown that the best investment mix is of majority private capital, with some early
stage public funding. Mechanisms for public funding, such as Enterprise Alberta, are already in
place. Therefore, the most effective policies going forward are ones which take steps to increase
the flow of private capital into these firms.
Structures
Other jurisdictions have successfully used an income tax credit to spur investment in small
businesses. With high pickup rates, low costs, and general efficiency, they illustrate how such a
program may be structured and potential outcomes.
2
http://aeda.alberta.ca/media/11184/final-abcomp-2013-may-22-2014-re-26.pdf
http://www.bankofcanada.ca/wp-content/uploads/2014/05/mpr-summary-2014-10-22.pdf
4
https://www.cvca.ca/files/Downloads/Government_Involvement_in_the_VC_Industry_Intl_Comparisons_May_2010.pdf
5
http://strategy.sauder.ubc.ca/hellmann/pdfs/BranderDuHellmannOct04.pdf
3
The following table outlines how investor tax credits are designed in some other provinces. The
table provides a rough outline of what such a program could possibly look like in Alberta and
areas where policy makers have leverage to tailor it to meet Alberta’s unique needs.
British
Columbia6
Manitoba7
New
Brunswick8
Nova Scotia9
Program
Name
Investment Capital
Program
Small Business
Investor Tax Credit
Equity Tax Credit
Amount of
Credit
30%
Small Business
Venture Capital Tax
Credit Program
45%
35%
Credit Limit
 Individual investor
claim $60k/year
 Carried forward 4
years
 No limit for
corporate investor
 Business may raise
max $5M of direct
investment,
 Business may raise
max $10m from
multiple VCC in any
2 year period
Individuals: Yes
Corporations: No
 Max credit earned
$202.5k
 Claim max
$67.5k/year
 Carry forward 10
years, or back 3
 Raise min $100kmax $10m
 30% for individuals
 15% for
corporations and
trusts
 Earn a max credit
of 75k
 Carry forward 7
years, or back 3
 Raise min. $10k
 At least 3 investors
-may not be
replacement shares
N/A
No
No
No
 At arms-length
from business or
major share holders
 B.C taxable
individual or
corporations
 Invest min $20k$450k
 In the last 24
months, must not
have owned more
than 35% of issued
shares of issuer
 Accredited
investor, or signed
Acknowledgement
of Risk
 Individual invest
min. of $1k
 Corp or trust
invest min. of $50k
 Resident of Nova
Scotia, over 19
years of age
Limit on
Investment
Received
Refundable
Investor
Eligibility
6
 $17.5K/year
 Carry forward 7
years, or back 3
http://www.mit.gov.bc.ca/ICP/Documents/Investment%20Capital%20Programs%20Brochure.pdf
http://www.gov.mb.ca/jec/pdfs/sbvctc_guiding.pdf
8
http://www2.gnb.ca/content/gnb/en/departments/finance/taxes/credit/program.html
9
http://www.novascotia.ca/finance/en/home/taxation/tax101/personalincometax/equitytaxcredit/default.aspx
7
Business
Eligibility
 <100 employees
 75% of wages to
B.C residents (50%
if engaged primarily
in exports)
 Engage in
“prescribed
activity”
 Already raised
$25k in equity
capital
-Incorporated in B.C,
Federally, or extraprovincially
 <50 fulltime
employees
 25% of employees
Manitoba residents
 <$15m in gross
revenue
 Non-reporting
issuer
 Previously issued
less than $10m
under program
 At least 25k in
stated assets
 CCPC
 May not use
investment
proceeds in
“ineligible business
activities”
 <40m in assets
 75% of wages to
NB residents (50% if
primarily engaged
in exports)
 Private company
 Incorporated or
registered to carry
out business in NB
 <25m in assets and
revenue
 25% of wages paid
to Nova Scotia
residents
 May continuously
apply for program,
as long as they stay
below the cap
 May not be
”accountant,
dentist, lawyer,
medical doctor,
veterinarian, or
chiropractor”
Share
stipulations
 Common or
preferred
 Held for 5 years
 Common or
preferred
 Represent new
shares issued by
issuer
 Held for 3 years
 Held for 4 years
 Minimum of 3
investors
 Held for 5 years
 non-convertible,
voting, common
shares
 Must have 3
investors during
each offering
Option of investing
in a Community
Economic
Development Fund,
which in turn invests
in businesses
Other Program Investment may be
made through direct
Details
investment, venture
capital corporation,
or the employee
shared ownership
program (varying
stipulations)
Issuers are required
to provide annual
report to
administers for each
fiscal period in
which they issue
shares under the
program
Similar programs exist in other jurisdictions as well, including the Yukon and Prince Edward
Island. Quebec has a number of programs supporting investment, including labour sponsored
venture capital corporations, stock saving plans, and a tax credit for individuals who purchase
shares in a venture capital company.10
One notable exception is Ontario, which currently has no incentive structures in place for
investors. However, a 35% refundable investor tax credit based on the B.C model was a key
element in the Mcguinty Liberal’s re-election platform in 2011.11 It is unclear why this popular
campaign promise was not acted upon. However, the Ontario Liberal’s minority government, a
10
11
http://en.planiguide.ca/tax-planning-guide/section-7-investments/investment-programs/
http://www.omersventures.com/pdf/Canada_An_Innovation_Nation_Not_Yet.pdf
change in party leadership, and an unexpected era of austerity due to a projected $30billion
dollar deficit by 2017-18, all seem to be contributing factors.12
Results
There has been a paper published out of the University of British Columbia, evaluating their
province’s program. Looking at data from 2001 to 2008, it found that $256 million in tax credits
issued helped to attract $2.3 billion of equity investments, helping to create over 4,000 jobs.
They also estimated that the average company participating in the program raised a total of
$2.14M of equity. In the same period, every $1 given as a tax credit generated $2 in provincial
tax revenue, making it a net financial gain for the province.13 14
A 2010 survey of B.C investors found that 73.8% of respondents said they would invest less
without the tax credit and 11.9% said they would not invest at all. If this program did not exist
41.3% said they would seek to invest more in the US, 23.8% more in Canada outside B.C.15
In Nova Scotia, the program has been incredibly popular, and there are strong advocates for its
expansion. Between 2002 and 2011, $115.7 million was invested using the program, in
exchange for $35.7 million in tax credits. It hit a historical peak in 2006, right before the
recession, with $5million in tax credits being leverages into over $16million in investment. The
success of this program, has led some to suggest an Atlantic Canada-wide initiative to attract
capital investment.16
Other Consideration


12
In 2015/16, the B.C program’s estimated cost will be $25million dollars.17
o By comparison, Alberta’s Scientific Research and Experimental Development Tax
Credits cost an estimated $82 million dollars in 2014.18
o The Equity Tax Credit in Nova Scotia is estimated to only cost $1.5million in
foregone revenue.19
British Columbia has implemented an online system to minimization registration time (2
weeks) and compliance costs for businesses20
http://www.cbc.ca/news/canada/toronto/drummond-report-on-ontario-calls-for-cutbacks-1.1138568
http://www.mikevolker.com/Hellmann_Venture_Capital_Report_2010.pdf
14
http://www.initiativespg.com/wp-content/uploads/2014/06/VentureCapitalPresentation.pdf
15
strategy.sauder.ubc.ca/hellmann/pdfs/Angels%20in%20BC%20Preliminary%20Survey%20Report%20October%202010.pdf
16
http://entrevestor.com/images/uploads/Entrevestor_September_2012.pdf
17
http://bcbudget.gov.bc.ca/2014/bfp/2014_budget_and_fiscal_plan.pdf
18
http://www.finance.alberta.ca/publications/Budget/budget2014/fiscal-plan-tax-plan.pdf
19
http://www.novascotia.ca/premier/publications/Savoie-Report.pdf
20
http://www.initiativespg.com/wp-content/uploads/2014/06/VentureCapitalPresentation.pdf
13
May be easily integrated in Alberta’s Small Business Resources website
framework
Generally high utilization of allocated credits (seen multiple expansions across
jurisdictions)
Early stage investment spurs more investment from other sources and a “legacy effect”
in which successful businesses make generous contributions back into the overall
business community
A program in Alberta does not necessarily need to limit credit to “prescribed activities”
but it may be leveraged in the future to increase investment in specific sectors
o



Conclusion
In order to increase capital investment in small businesses, and contribute to the overall stability
and growth of the Albertan economy, the provincial government should incentivize investors
through an income tax credit. Considering Alberta is the only jurisdiction without this type of
program, it stands as an effective tool that the province should take advantage of. As has been
shown in British Columbia, it is possible to create a very successful program without a loss to
tax revenue and large administrative costs. This creates a more efficient outcome than direct
government participation in investment decisions, and keeps both the investment of capital and
the subsequent rewards within the province.
Alberta is fortunate to have large pools of capital, yet a system must be put in place to
encourage the flow of this capital back into the province’s small businesses. This tax credit is a
hands-off approach which puts the onus on investors to make the final decision on risk and
efficiency, but incentivises them to keep their money within Alberta and put it toward high-growth
businesses. A program such as this is an important step towards protecting the long-term health
of the Albertan economy, while ensuring that the province remains competitive for both investors
and small businesses owners.