The Next Step Toward Modernizing The Small Business Venture Capital Tax Credit Program In Manitoba

As Manitobans and Manitoba businesses navigate the new geopolitical and economic realities of tariffs from the United States, it has never been a more critical time for governments to create the appropriate conditions to encourage local investment.

In Manitoba, through the Small Business Venture Capital Tax Credit Program (the "Program"), subject to conditions, eligible investors are entitled to a 45% non-refundable tax credit up to $225,000 against their Manitoba taxes for investments of up to $500,000 in eligible Manitoba small businesses.

While the Program is becoming a staple program that is growing in popularity among Manitoba eligible small businesses ("ESBs") looking to raise capital locally, in its present form, the program is less dynamic than comparative programs in British Columbia, Alberta and Saskatchewan.

This policy gap creates a competitive disadvantage and leaves potential funds on the table at a time in our economic history where every dollar counts for Manitoba ESBs.

In our previous blogs, we have written about how the Government of Manitoba could improve the Program by allowing for Simple Agreements for Future Equity (SAFEs) and lowering the minimum investment requirement from $10,000 to $5,000.

While we continue to advocate for those changes, the next comprehensive steps are to modernize the Program by:

1. Adopting a system for venture capital corporations ("VCCs"); and/or
2. Allowing limited partnerships to hold shares of ESBs and flow tax credits through to their eligible limited partners that are resident in Manitoba.

VCCs

VCCs, which exist under the British Columbia's Small Business Venture Capital Program, Alberta's Investor Tax Credit Program and Saskatchewan's Technology Startup Incentive Program, are corporations that are created for the sole purpose of raising funds and investing in ESBs under their applicable tax credit programs. What is uniquely beneficial about VCCs is that the investors of the VCC, not the VCC itself, receive the tax credits, even though the VCC directly invests in and holds the shares of the ESBs.

For the purposes of this blog post, we will be referring to the precedent VCC model under the Small Business Venture Capital Act (British Columbia) and the regulations thereunder (the "BC SBVC Legislation").

While the VCC system is desirable for some investors, it has strict regulatory parameters that limit its use and/or applicability. In British Columbia, in order to qualify as a VCC, a company must:

• be a newly incorporated company under the Business Corporations Act (British Columbia) without any prior business activities that is pre-registered under the Small Business Venture Capital Act (British Columbia) prior to making any investments;
• have "(VCC)" in its corporate name to identify it as such (e.g. Good Investment (VCC));
• have initial equity capital of at least $25,000, similar to ESBs;
• raise a minimum of $50,000 under the program by the first anniversary of its approval under the program and seek pre-approval by the administrator of the program if it wishes to raise additional funds and issue shares;
• only make investments in ESBs under the BC SBVC Legislation;
• pay an amount of money equal to 30% of all amounts received by it as equity capital into an investment protection account that meets certain criteria;
• comply with the expense limitations and notice requirements set out in the BC SBVC Legislation;
• only issue common shares without par value and without any special rights, except share redemption rights;
• have articles that restrict the business of the company to assisting development of small businesses by making investments permitted by the BC SBVC Legislation and providing business and managerial expertise to small businesses in which it has made or proposes to make an eligible investment; and
• hold its shares of the ESB for a minimum of five years from the date of issuance.

Limited partnerships

While the VCC model includes specifically made corporations, it does not apply to or include limited partnerships.

Under Saskatchewan's Technology Startup Incentive Program, which also has a VCC model system in place, limited partnerships may subscribe for shares of an ESB and the tax credits flow directly through the limited partnership to the eligible limited partners in proportion to their ownership.

In order to qualify in Saskatchewan, a limited partnership must:

• be able to determine the limited partners' proportionate share of an investment in an ESB;
• file a declaration of limited partnership in accordance with the Business Names Registration Act (Saskatchewan);
• not alter the ownership interest of its partners without the prior written approval of the program;
• not claim more than 33% of all the tax credits available in the program in a given year;
• not benefit from other tax incentive programs in other provinces;
• have limited partners who are resident and pay taxes in Saskatchewan – we note that it is not a requirement for all of the limited partners to be resident and pay taxes in Saskatchewan; however, non-resident limited partners are not entitled to receive the tax credit; and
• ensure its limited partners have an exemption under applicable securities laws and hold their investment in the limited partnership for at least three years following the investment in the ESB.

Limited partners that receive the tax credit for an investment made by a limited partnership may also invest in that ESB on their own; however, they will be subject to the same individual limit.

Why is access to VCCs and limited partnerships beneficial?

1. Both policy solutions allow groups of investors to pool funds together into single entities without sacrificing their individual tax benefits.
2. Pooling investors together into single entities allow them to diversify the risk of their investments, receive strategic advice from the managers of those entities and give those investors more bargaining power when negotiating transactions with ESBs.
3. Early stage ESBs often prefer to keep their capitalization tables as small as possible to simplify approval processes and to attract investment from larger scale venture capital firms.

While implementing these policies may simplify the capitalization of ESBs, if adopted, we would caution ESBs to be mindful of securities law requirements pertaining to the calculation of the number of beneficial holders of the securities under National Instrument 45-106 – Prospectus Exemptions.

In the face of growing economic uncertainty caused by tariffs, we encourage the Government of Manitoba to consider modernizing the Program to implement a system for VCCs, similar to the programs in British Columbia, Alberta and Saskatchewan and/or allow limited partnerships to flow tax credits to their eligible limited partners resident in Manitoba, similar to the program in Saskatchewan. These changes will support ESB and help make Manitoba a more competitive market for local investment.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.