On December 9, 2016, the Alberta NDP government enacted two important tax incentives that were first announced in the government’s April 2016 Budget. The incentives were established to encourage capital investment in and by Alberta businesses, and to promote economic diversification.
Capital Investment Tax Credit (CITC)
The CITC is a non-refundable tax credit of up to 10 per cent of the cost of capital investments made after December 31, 2016 in certain “eligible qualified property” (EQP), to be used and located in Alberta.
Two types of EQP are defined:
- Buildings, machinery, and/or equipment acquired primarily for manufacturing or processing goods for sale or lease. Certain sectors will generally not qualify, such as oil and gas, mining, construction, and farming.
- Depreciable capital property to be used primarily for the purpose of “providing or operating tourism infrastructure” in Alberta. Thus far, few details have been provided to define what will be included in tourism infrastructure.
Property where 30 per cent or more of the cost is funded via certain other forms of government assistance is ineligible. EQP can be either new or used.
Approval Requirements
The CITC program will operate for two years, with a budgeted cap of $70 million. Grants will be approved from this fund on a competitive basis, to corporations making eligible capital investments of $1 million or more, and the government has indicated credits for any applicant will be limited to $5 million.
Corporations will be required to apply for a conditional approval letter before making investments and to submit a “proposed investment plan,” which will include a list of EQP that the corporation intends to acquire and estimated capital costs. The corporation must also submit an “economic impact assessment” describing the potential economic, social and environmental impacts of the proposed investment plan.
EQP must be acquired within two years of the date of issuance of the conditional approval letter. The CITC can only be claimed after eligible property has been acquired and is available for use, as set out in an approved investment plan.
Given the competitive nature of the program and cap on the total credits, it appears it will be important to apply early, although details of the application process are yet to be released.
Alberta Investor Tax Credit (AITC)
Under the new three-year AITC program, individual investors (excluding trusts and estates) can qualify for a refundable Alberta tax credit, computed as 30 per cent of the investment in equity of an eligible small business corporation. The maximum credit permitted in any year is $60,000, corresponding to $200,000 of equity subscription, although it appears investors may exceed the maximum investment in a particular year and carry forward the excess tax credit for application in up to four subsequent taxation years.
A corporation may also qualify as an “eligible investor” under this program, and can obtain a non-refundable 30 per cent tax credit. There appears to be no maximum credit imposed on corporate investors, as there is for individual investors.
To encourage arm’s-length investment, eligible investors may not control, together with various affiliated and associated persons, the issuing corporation, nor may they hold rights entitling them to acquire control.
Eligible Issuers
To qualify, eligible business corporations must meet a variety of conditions and register with the government, in order to be entitled to issue “tax credit certificates” to investors.
Conditions to qualify as an “eligible business corporation” include:
- Must be “substantially engaged” in prescribed industries or activities. While regulations are yet to be published, the government has indicated that eligible businesses will include: technology research, development or commercialization; interactive digital media development and game products; post-production services, or tourism operations.
- Incentives will target “small businesses,” defined as those with no more than 100 employees.
- A minimum percentage of the corporation’s salaries must be paid to persons who report for work in Alberta.
- The corporation must have at least $25,000 of existing equity capital.
These eligibility conditions will be clarified when related regulations are released.
Equity Capital Qualified for the Credit
Only investments made by way of “equity share” subscriptions will qualify, including voting shares, non-voting shares, preferred shares and also warrants, options and other rights to acquire shares. To qualify for the AITC, the subscription must be fully paid in cash, cannot include contingent rights to acquire control of the corporation’s Board of Directors, and cannot include rights for the securities to be repurchased or redeemed within five years of issuance. Shareholders who dispose of shares of a particular corporation must wait two years before they are permitted to qualify to receive the AITC for newly issued shares of that corporation.
The provisions will restrict how the equity capital raised using AITCs is deployed by the issuer, with the consequences being potential revocation of AITC registration and repayment of all AITC credits. Prohibited uses include:
- lending,
- investing outside of Alberta,
- investing in land not “incidental or ancillary” to the eligible business activities supporting the AITC,
- acquiring securities (except equity shares of affiliates who also meet AITC eligibility criteria),
- payment of debt obligations,
- payment of dividends or repurchase of shares.
For share subscriptions made in the first 60 days of a particular year, investors who are individuals can elect to claim credits in the preceding year. Subscriptions for qualifying shares on or after April 14, 2016 will qualify for the AITC, and will be deemed to arise in 2017.
It appears eligible corporations will be limited to a maximum dollar amount of additional equity that can be eligible for the AITC, but that maximum is yet to be prescribed.
The legislation also allows investors to obtain credits through venture capital corporations and community economic development corporations.
Future Share Dispositions
The legislation prohibits redemption, repurchase or transfer of shares eligible for AITC within five years of issuance, except for under prescribed circumstances (not yet identified). However, the provisions go on to provide that should the corporation redeem or repurchase shares issued under the AITC program within five years of issuance, the corporation must repay the AITC to the government, and for any other sale of the shares within five years of issuance, the subscriber must repay the AITC. In some circumstances, the government can potentially reduce the repayment, so further details will be needed to understand when that policy would be considered.
Applying for the CITC and AITC
The application process for the CITC and AITC is expected to begin in January 2017, although no details have been announced at the time of writing.
If your business could potentially benefit from these tax credits, please contact your Collins Barrow tax advisor to discuss how we can help you determine if you qualify, and help you navigate the application process.
Heather Forbes is a Tax Manager in the Calgary office of Collins Barrow.
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