British Columbia’s Small Business Venture Capital Act provides a 30% tax credit to eligible investors in corporations involved in a “prescribed business activity” within BC. For individuals the tax credit is fully refundable and isn’t considered taxable under paragraph 12(1)(x) of the Income Tax Act:
SUBSECTION 12)(1) – INCOME INCLUSIONS
(x) Inducement, reimbursement, etc. — any particular
amount (other than a prescribed amount) received by the tax –
payer in the year, in the course of earning in come from a busi –
ness or property, from
(i) a person or partnership (in this paragraph referred to as the
“payer”) who pays the particular amount
(A) in the course of earning in come from a business or prop –
erty,
(B) in order to achieve a benefit or advantage for the payer or
for persons with whom the payer does not deal at arm’s
length, or
(C) in circumstances where it is reasonable to conclude that
the payer would not have paid the amount but for the receipt
by the payer of amounts from a payer, government, munici –
pality or public authority described in this sub paragraph or
in sub paragraph (ii), or
(ii) a government, municipality or other public authority,
where the particular amount can reasonably be considered to
have been received
(iii) as an inducement, whether as a grant, subsidy, forgivable
loan, deduction from tax, allowance or any other form of in –
ducement, or
(iv) as a refund, reimbursement, contribution or allowance or
as assistance, whether as a grant, subsidy, forgivable loan, de –
duction from tax, allowance or any other form of assistance, in
respect of
(A) an amount included in, or deducted as, the cost of prop –
erty, or
(B) an outlay or expense,
to the extent that the particular amount
(v) was not otherwise included in computing the taxpayer’s in –
come, or deducted in computing, for the purposes of this Act,
any balance of undeducted outlays, expenses or other
amounts, for the year or a preceding taxation year,
(v.1) is not an amount received by the tax payer in respect of a
restrictive covenant, as de fined by sub sec tion 56.4(1), that was
in cluded, under subsection 56.4(2), in computing the income
of a person related to the taxpayer,
(vi) except as provided by subsection 127(11.1), (11.5) or
(11.6), does not reduce, for the purpose of an assessment made
or that may be made under this Act, the cost or capital cost of
the property or the amount of the outlay or expense, as the case
may be,
(vii) does not reduce, under subsection (2.2) or 13(7.4) or
paragraph 53(2)(s), the cost or capital cost of the property or
the amount of the outlay or expense, as the case may be, and
(viii) may not reasonably be considered to be a payment made
in respect of the acquisition by the payer or the public author –
ity of an interest in the taxpayer, an interest in, or for civil law a
right in, the taxpayer’s business or an interest in, or for civil
law a real right in, the taxpayer’s property;
The key wording here is:
(other than a prescribed amount)
VCC tax credits are prescribed by Regulation 7300 of the Income Tax Act to be “prescribed amounts” for the purposes of paragraph 12(1)(x). Not only do recipients not have to include the tax credit in income, they don’t have to reduce the Adjusted Cost Base of the underlying shares after receiving the tax credit (Regulation 6700)
This is a good deal for investors – to extent that investments in such companies can ever be considered “good” for investors. It also means that friends and family can invest in eligible shares and obtain a full deduction for the share when transferring to a self-directed RRSP.