Primer on the Eligible Business Corporation (EBC) Tax Credit Process
Is your company eligible for registration as an Eligible Business Corporation (“EBC”) under the Small Business Venture Capital Act (British Columbia)?
If so, investors may receive a 30% tax credit from the provincial government for investing in your company. That is a significant perk to offer your investors!
We’ve created a quick primer of the process of raising capital under the EBC tax credit program. There are a lot of nuances around this, so talk to us in more detail if you’re considering this path.
1. Review the EBC Website
Review the EBC website to ensure your company can qualify for EBC registration. Their website is very helpful and easy to navigate.
As of the date of this post, the requirements to qualify include, but are not limited to:
(a) being registered to do business in BC;
(b) having a permanent place of business in BC;
(c) having no more than 100 employees;
(d) paying at least 75% of annual wages and salaries to BC employees;
(e) being “substantially engaged” in one or more “qualifying activities”;
(f) having at least 80% of assets located within BC; and
(g) having at least $25,000 in equity capital.
2. $25,000 in Equity Capital
This is the most common speed bump we see with startups wanting to be an EBC.
In short, this means that your company must have sold shares from its treasury for at least $25,000 in cash – and that transaction must be reflected in your securities registry. If your securities register only shows nominally priced shares issued to the founders, for example, then you are not eligible to apply.
If you don’t have that $25,000 in equity capital, you need to either: (1) sell shares for at least $25,000 before you apply as an EBC; or (2) convert into shares at least $25,000 in loans that have been made to the company.
This initial $25,000 is not eligible for tax credits.
Talk to us about which solution is best for your company.
3. Submit Application for Equity Authorization
Before you raise capital, you will need to apply to the BC Investment Capital Branch for “equity authorization”. Essentially, this is the step of getting their pre-approval for you to do a financing under this tax credit program. Getting the equity authorization is a requirement to participate in the program, but it doesn’t guarantee the availability of tax credits for your investors. Tax credits are available on a first come, first serve basis. So the longer you delay financing after your equity authorization is received, the greater the chance that tax credits will not be available.
To complete the application, you will need:
EBC Registration Application;
Business plan or executive summary of business plan; and
Central securities register showing $25,000 in equity capital.
4. Update Financing Documents to Reflect EBC Registration
Ensure the documents that your investors are using to invest in the company (e.g., subscription agreement or SAFE) are modified to account for the company’s EBC status.
Standard financing documents don’t include the types of representations, warranties and covenants that you need in place when doing one of these tax credit financings. You are also required to include a share purchase report (in the proper form) in your financing documents.
The standard SAFE (based on Y-Combinator’s form) is not approved for tax credits. To use a SAFE and offer investors tax credits, your lawyer will need to customize the SAFE to meet the requirements.
Debt and convertible debt are not approved for tax credits.
So ensure you discuss your financing strategy with your lawyer before taking in investment.
5. Close Financing and File Share Purchase Reports
After you complete each investment, you will need to file the standard form EBC Share Purchase Report with the BC Investment Capital Branch. If you don’t do this, the investor won’t get their tax credits. So don’t miss this! Your lawyer doesn’t typically do this for you.
Tax credits are claimed through the electronic tax credit application system (eTCA). That is where you enter the details of the investment and print your investors’ Tax Credit Certificates.
To access eTCA, you’ll need: (1) a BCeID and password (your lawyer may have this already) and (2) a venture capital program registration number and PIN (provided by the BC Investment Capital Branch after you get equity authorization).
6. Annual Reporting Requirements
The company must file an annual return with the BC Investment Capital Branch within 6 months of its fiscal year end. These annual returns must be filed for 5 years after the company’s most recent issue of securities for which tax credits were granted.
The following must be submitted together with each annual return:
· Central Securities Register;
· most recent Financial Statements; and
· most recent annual report filed with the registrar of companies.
Failure to meet all these requirements can cause your authorization to be revoked or suspended. It is therefore really important that you set reminders in your calendar so that these don’t get missed!
Ink LLP is a business law firm that acts as strategic counsel to ambitious entrepreneurs, investors, and high-growth companies. Contact one of our lawyers to discuss your business and how our team might be able to help you tackle the challenges of your business and the opportunities for growth.
This information is provided for informational purposes only and is not legal advice.