Direct Equity Tax Credit Guidelines The Newfoundland and Labrador Direct Equity Tax Credit provides investors with a tax credit for their direct investment in eligible local businesses, effective October 30, 2000. Eligible Investors The credit is available to individuals 19 years of age or older who are residents of Newfoundland and Labrador or otherwise paying income tax to the Province and corporations which operate at arm’s length from the eligible business. The Province of Newfoundland and Labrador in no way guarantees the value of any shares issued by an eligible business. Nor does it in any way express an opinion as to the financial condition of the issuing company or the merits of an investment in shares of the issuing company. Eligible Investments Eligible investments are newly issued common voting shares of the corporation that are non-redeemable, non-convertible and not restricted in profit sharing or participation upon dissolution. The shares cannot be eligible for any other tax credit or deduction allowed under the Income Tax Act, except as a deduction for RRSP purposes. The shares must be fully paid for in cash. In addition, shares are not eligible if the individual investor disposed of any shares of the eligible business at any time after March 22, 2000 and before the specified issue of shares. Shares purchased by a corporate investor are not eligible if that investor disposed of any shares of the eligible business at any time after March 27, 2003. The specified issue of shares refers to those shares that are specified in the business’ s application for a Certificate of Registration as an Eligible Business. Eligible Businesses In order to qualify as an eligible business, a corporation shall:
Qualifying Activities The program is targeted to small businesses engaged in growing areas of the economy, such as:
But not companies whose primary business is, or who intend to use funds raised under this program for, the following:
Prohibited Use of Funds Funds raised by the eligible business must be used in an active business and cannot be used for any of the following purposes:
The Tax Credit Targeting Outside North East Avalon There are two tax credit rates. Where the qualifying activities are undertaken in the Province outside the North East Avalon, a 35% rate applies. Where the qualifying activities are undertaken within the North East Avalon, a 20% rate applies. Where qualifying activities are undertaken both inside and outside the North East Avalon, a reasonable pro-ration would apply. The North East Avalon includes Bauline, Conception Bay South, Flatrock, Logy Bay-Middle Cove-Outer Cove, Paradise, Petty Harbour, Portugal Cove-St Philip’s, Pouch Cove, Torbay, Mount Pearl and St. John’s. The location of the investor is not a consideration in determining the tax credit rate. Company Fund Raising Limits The maximum capital that any one eligible company may raise in respect to a particular offering or project, for which tax credits could be issued under this program, is $700,000. Maximum Investor Credit The maximum annual tax credit per eligible investor is $50,000. For individuals, the tax credit may be claimed in the year in which the eligible shares are purchased, or, if purchased within 60 days of a calendar year, may be claimed in the previous year. For eligible corporate investors, the tax credit would be claimed in the fiscal year in which the investor purchased the eligible shares. The credit is not refundable but may be carried forward for seven years or carried back three years, however, corporate investors can not carry back in fiscal years ending prior to April 1, 2004 and individuals can not carry back prior to the 2000 taxation year. The $50,000 maximum credit includes any carry forward (or back) amounts used in a given year. Non Redeemable Period Eligible businesses are not allowed to redeem eligible shares for five years after issuance. If shares are redeemed then the eligible business shall pay to the Minister a penalty equal to the tax credit allowed with respect to the shares, plus interest. Application A business seeking eligibility must make application to the Department of Finance to obtain certification. This verifies that the specified shares are eligible for the tax credit. Pre-approval of eligibility is required. This eligibility does not constitute any approval that may be required from the Securities Commission of Newfoundland. The following information should be included with the application:
Certification The certification of a corporation shall be valid for a period of three months, unless that period is extended by the Minister. Only those shares which have been issued during this time period will be eligible for the tax credit. The total value of eligible shares shall not exceed the amount authorized under the certification. Tax Credit Receipts Tax credit receipts will be issued by the
Department of Finance upon receipt of appropriate documentation by the
Eligible Business. The tax credit receipts must then be submitted with the
investor’s T1 or T2 Income Tax return, as applicable, for the year. Eligible businesses shall supply financial statements, as required by the Minister. These statements must include an independent auditor’s statement that the corporation is in good standing and that the specified share issuance meets all the requirements of the Direct Equity Tax Credit program. Upon request, eligible businesses shall supply information confirming the use or disposition of capital raised under the Direct Equity Tax Credit program, to ensure compliance with requirements such as qualifying business activities and prohibited uses of funds. Eligible businesses shall also provide a detailed status report of shareholdings for five years after specified share issuances and detailed information on the directors of the investing corporation. Additional Information Additional information may be obtained by contacting: Government of Newfoundland and Labrador The Direct Equity Tax Credit Regulations
under the Income Tax Act may be found at: |
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