This is an overview of the very popular and successful British Columbia Investment Tax Credit program that gives investor a refundable tax credit of 30%. Why not make it a national program?

Incentive:

30% REFUNDABLE Tax credit for Investors who invest in “Eligible” Businesses – good as cash

Annual limit:

$200,000 investment for a maximum annual tax credit of $60,000 per individual investor

Vehicles:

1.  Investors can invest directly in an Eligible small business (“ESB”) and get the tax credit (but must hold or reinvest the principal amount for 5 years – or pay back a pro-rata portion of the tax credit)

2. Investors can invest in a holding company referred to as a Venture Capital Corporation (“VCC)”) which in turn can invest in one or more eligible businesses). In this case the investors do NOT have a 5-year hold period. However, the VCC must deploy the funds for at least 5 years. VCCs can redeem shares from gains after the 5 year period.

Budget:

The Provincial budget is currently $30 million, i.e. $100 million of capital can be raised using these tax credits. Up until 2009, this budget limit was reached early each year. Four large VCCs which raised money from retail investors (like labor-sponsored funds) were given 50% of the budget allocation.

RRSP Eligibility:

Investors can also put their VCC shares into an RRSP or have the RRSP buy the shares in a VCC in which case the RRSP annuitant gets the 30% personally, tax-free, outside of the RRSP – a superb incentive. In B.C. this means that a top marginal taxpayer can invest $100,000 in a small business and immediately get back $74,000 in tax savings (30% tax credit for the VCC and 44% RRSP deduction).

Administration:

The program is operated by the Investment Capital Branch of the Small Business Ministry  and is governed by the Small Business Venture Capital Act. Administration is minimal – web-enabled processes, forms, reporting are all well established and fairly straight forward. Little overhead is required. Very little red tape or bureaucratic delays and approvals (especially as of late).  The VCC aspect of the program has been in existence in B.C. since the 90’s but the program was overhauled in 2002 to allow for direct investment (without setting up a special VCC). Since then, additional improvements have been made to the program to cut red tape.

Bottom Line:

Over the past 5 years, more than $500 million has been raised from private investors and placed in eligible enterprises in B.C.

Drawback:

This is a B.C. only program. Non B.C. residents who invest in B.C. companies do not get the same favourable treatment as B.C. residents.

Recommendation:

Why not make it a Canada-wide plan? Various organizations (e.g. the National Angel Organization) have been lobbying for some time to get the Federal government to establish a 15% tax credit matched by a 15% provincial credit – to increase the program size and make it nation-wide.

Footnotes & Addenda:

30Oct2010: Just released: A study by UBC Professor Thomas Hellman on the VCC program. For a copy of his report, [click here].