Proposed Alberta Investment Tax Credits

On December 1, 2016, Bill 30 passed third reading in the Alberta legislature; the bill introduces the Alberta investor tax credit (AITC) and the capital investment tax credit (CITC). At the time of writing, there are 70 pages of draft legislation, no explanatory notes, and Hansard transcripts of approximately 75 minutes of debate in the legislature. The draft legislation contains 85 instances of the term “prescribed,” meaning that regulations will be have to be promulgated in order to implement these credits. To date, I am not aware of any draft regulations.

Alberta Investor Tax Credit

The AITC was introduced after heavy lobbying by the Alberta technology sector to bring the province’s tax system in line with that of British Columbia, which has had a similar investor tax credit since 1985. According to Alberta’s Ministry of Economic Development and Trade, over the last 10 years Alberta has consistently lagged behind British Columbia, Ontario, and Quebec in venture capital dollars invested. It was felt that this lack of venture capital has limited the growth and commercialization potential of small and medium-sized businesses in Alberta. In British Columbia, the investor tax credit program has resulted in the province building a market and a community for venture capital; Alberta hopes to replicate that result. A $90 million cap has been placed on aggregate AITC claims, and claims will be approved on a first-come, first-served basis until the $90 million target has been hit.

The AITC is a 30 percent tax credit for share investments made in Alberta small businesses between April 14, 2016 and December 31, 2019. At the time of writing, the definition of “small business” is uncertain. Bill 30 says that the phrase “means a corporation that has no more than the prescribed number of employees calculated in the prescribed manner.” It is unclear how much of the corporation’s business must be carried on in Alberta. The two requirements in this regard are that (1) “at least the prescribed percentage of the wages and salaries, determined in the prescribed manner, of the small business is or will be paid to employees who regularly report to work at operations located in Alberta”; and (2) “the small business, if required by a condition of the Minister, is or will be substantially engaged, as determined in the prescribed manner, in Alberta in a prescribed business activity that is specified by the Minister in the condition.” That wording embodies substantial uncertainty and ministerial discretion in only two of the several conditions that must be met in order to qualify for funding under the proposed AITC program. An eligible business will be permitted to raise a maximum amount of $5 million directly through investors or $10 million through Alberta venture capital corporations in every two-year period.

The maximum tax credit for an individual (other than a trust) will be $60,000 per year (based on qualified investments of $200,000 per year). On November 10, 2016, the minister of economic development and trade said in the provincial legislature that “[t]he tax credit would be refundable . . . and could be carried forward for up to four years for individual investors.”

It is not clear why a four-year carryforward would be needed for a refundable tax credit. Section 82(3) of Bill 30 adds sections 35.01(3)-(5) to the Alberta Personal Income Tax Act; these sections seem to give the minister the discretion to refund the excess of the amount of the tax credit over the Alberta tax otherwise payable—a novel refundable tax clause. There is also a mandatory refund of any unused part of the AITC in the event of the investor’s death during the five years following the year in which the most recent investor tax credit certificate was filed.

For corporate investors, there will be no maximum tax credit; the credit will be non-refundable and will be available for carryforward for up to four years.

The shares on which the AITC is claimed may be redeemable or retractable, but not for the first five years following issue. The shares may be acquired by an RRSP or a TFSA. The original purchaser (whether an individual, a corporation, an RRSP, or a TFSA) may not sell or transfer the shares for at least five years. An estate or trust (other than an RRSP or a TFSA) is not eligible to acquire shares under the AITC program.

The AITC is only available for equity investments in corporations that are “substantially engaged in proprietary technology research, development, or commercialization; interactive digital media development; video postproduction; digital animation; or tourism” (Alberta Hansard, November 10, 2016). Instead of making the AITC a broad-based investor tax credit and allowing investors and businesses to be matched on market principles and risk profile, the Alberta government has chosen the more prescriptive route of randomly (it appears) selecting a few non-resource-based business segments that will be partially funded by taxpayers.

Each business that wants to raise money that is eligible for the AITC will have to complete an application process with the government and follow procedures that have yet to be announced. The requirements for registration are set out in proposed sections 34-39 of Bill 30 and involve the government approving the application of the corporation applying for the eligible funding and then issuing certificates to the corporation and all investors that place equity funds with the corporation. Registration and applications are proposed to commence on January 1, 2017.

Bill 30 also provides for a register of venture capital corporations that may act as aggregators of eligible investments for shareholders and conduits for passing the AITC credits on to such shareholders.

Commentary on the AITC

The AITC’s short life span of two years, the relatively modest amount of credit available, and the bureaucratic process involved will likely result in applications from existing small, struggling technology companies in the prescribed fields applying for and receiving the funding and their investors using the tax credits. It is unlikely that a new technology company will decide to start up in Alberta as a result of this credit, rather than in, say, British Columbia, which has had its incentive in place for over 30 years and already has a relatively robust technology ecosystem.

Capital Investment Tax Credit

The CITC was introduced to encourage large-scale capital investment in Alberta. The CITC provides for a 10 percent non-refundable tax credit of up to $5 million for Alberta corporations involved in manufacturing, processing, or tourism infrastructure, with a minimum eligible capital investment of $1 million.

Unlike the AITC, which is issued on a first-come, first-served basis, the CITC is issued at the minister’s discretion in a competitive process based on the minister’s view of the investment’s positive economic impact on the Alberta economy. Not only has the government chosen to restrict the qualifying industries, it has also given itself wide discretion to select the specific businesses that will receive the credit.

A maximum of $70 million in credits will be granted under the CITC program (based on $700 million of eligible capital investment). The program becomes effective on January 1, 2017; expenditures must be made within two years of the issuance of the conditional approval letter from the minister.

Commentary on the CITC

Like the AITC, the CITC has a short life span of two years and makes a very modest amount of credit available. Moreover, the Alberta government will pick the winners and losers, both in terms of the qualifying industries and the specific businesses that will be granted the credit. To an outsider, it appears that those close to the government or the decision-making bureaucrats are likely to have the greatest chance of success under this program.

Jeffrey A. Fortin
Moodys Gartner Tax Law LLP, Calgary

Tax for the Owner-Manager
Volume 17, Number 1, January 2017
©2017, Canadian Tax Foundation