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Direct Equity Tax Credit Regulations
Direct Equity Tax Credit Regulations
Under the authority of subsection 46(5) of the Income Tax Act, 2000 , the Lieutenant-Governor in Council makes the following regulations.
1. These regulations may be cited as the Direct Equity Tax Credit Regulations .
2. In these regulations
(a) "Act" means the Income Tax Act, 2000 ;
(b) "active business" means an active business as defined under section 248 of the federal Act;
"arm's length" means arm's length as defined in section 251 of the Income Tax Act
(c) "associated corporation" means an associated corporation within the meaning of section 256 of the federal Act, except that the relevant time for determining the association shall be the date upon which that corporation applies for a certificate of registration rather than the taxation year of the corporation;
(d) "certificate of registration" means a certificate of registration issued under section 4;
(d.1) "corporate investor" means an arm’s length corporation;
(e) "eligible business" means an active business that
is incorporated under the laws of the province, another
(ii) is Canadian controlled,
(iii) is not a publicly traded corporation,
(iv) has a permanent establishment in the province,
(v) has less than $20,000,000 in assets, including assets of associated corporations,
(vi) utilizes all of the capital raised from the specified issue in the province, except that, where a product or service is developed in the province for an export market, the corporation may utilize capital for marketing the product or service outside the province, subject to the approval of the minister,
(vii) has no more than 50 full time equivalent employees,
(viii) has contributed not less than $25,000 in capital consisting of either or both of shareholder equity and shareholder loans before making an application for registration under the regulations, and
(ix) will engage in and utilize all of the capital raised from the specified issue for qualifying business activities;
(f) "eligible investor" means
(i) an individual investor, or
(ii) a corporate investor,
that invests in eligible shares of an eligible business;
(g) "eligible shares" means shares of an eligible business that are
(i) newly issued common voting shares which are part of a specified issue,
(ii) non-redeemable, non-convertible and not restricted in profit sharing or participation upon dissolution,
(iii) not replacement shares, and
(iv) not eligible for another tax credit or deduction allowed under the Act other than with respect to the registered retirement savings plan;
(g.1) "individual investor" means an individual 19 years of age or older;
(h) "north-east Avalon" means the towns of Bauline, Conception Bay South, Flatrock, Logy Bay-Middle Cove-Outer Cove, Paradise, Petty Harbour, Portugal Cove–St. Philip’s, Pouch Cove and Torbay incorporated or continued under the Municipalities Act, 1999 , the City of Mount Pearl incorporated under the City of Mount Pearl Act and the City of St. John’s incorporated under the City of St. John’s Act ;
(i) "replacement share" means a share purchased as a replacement for another share of an eligible business that
an individual investor may have disposed of after
a corporate investor may have disposed of after
and before the issue of the eligible shares in that business;
(j) "required form" means the form containing the information that the minister may require for the purpose of these regulations;
(k) "specified issue" means the issue of shares as specified in the application for a certificate of registration of an eligible business;
(l) "specified period" means the period referred to in subsection 4(2);
(m) "tax credit" means the direct equity tax credit granted under these regulations;
(n) "tax credit receipt" means a tax credit receipt issued by the minister under section 9; and
(o) "tax otherwise payable" means the amount that would, except for these regulations and the deduction allowed under section 40.1 of the Act, be the tax otherwise payable under the Act.
Application for registration
3. (1) Where a corporation intends to make a specified issue and that issue meets the criteria established under these regulations, that corporation may, in the required form, apply to the minister for a certificate of registration.
(2) An application for a certificate of registration shall
(a) indicate the name of the corporation;
(b) list the names and residential addresses of all directors of the corporation;
(c) include a copy of the certificate of incorporation of the corporation;
(d) state the amount of capital to be raised under the specified issue;
(e) include an investment plan containing a detailed description of the corporation’s proposed business activities and the proposed use for the capital to be raised by the specified issue;
(f) state the location of the proposed qualifying business activity; and
(g) include financial statements for the most recent year end of the corporation and associated corporations together with a review engagement report or auditor's report signed by a person who is licensed as a public accountant under the Chartered Professional Accountants and Public Accountants Act ;
(h) include income tax returns for the preceding taxation year for the corporation and associated corporations;
(i) include a statement signed by an authorized officer of the corporation stating that the information contained in the application is true and correct; and
(j) be in the form and contain other information that the minister may require.
Certificate of registration
4. (1) Where a corporation applies for a certificate of registration under section 3, the minister may issue that certificate to the corporation, with conditions that he or she considers to be appropriate, provided that the minister is satisfied that the corporation is an eligible business and has complied with section 3.
(2) A certificate of registration is valid for 3 months after the date that the certificate is issued by the minister unless extended by the minister.
(3) The minister may, at the request of a corporation, extend the time for which a certificate of registration is valid.
(4) The capital that may be approved by the minister with respect to a specified issue shall not exceed $3,000,000.
(5) The minister may suspend the issuance of certificates of registration where the total amount that will be deducted or deductible by eligible investors for the fiscal year of the province exceeds or will exceed $1,000,000.
Revocation of certificate of registration
5. (1) The minister may, at any time after a certificate of registration for a corporation has been issued, revoke that certificate if
(a) in his or her opinion, that corporation has not complied with these regulations;
(b) the corporation has misrepresented information to the minister either knowingly or in a manner that would be considered to be negligent; or
(c) the corporation has used the proceeds raised by the specified issue for a use that is not permitted under these regulations.
(d) Rep. by 71/04 s2
(2) Where the minister revokes a certificate of registration after a specified issue has occurred with respect to an eligible business
(a) where tax credit receipts have been issued, the eligible business is liable for and shall immediately pay to the minister an amount equal to the aggregate of the amounts of the tax credit receipts issued for that eligible business; and
(b) where tax credit receipts have not been issued, the minister shall not issue tax credit receipts with respect to that eligible business.
(3) An eligible business that does not utilise all of the capital raised from the specified issue for qualifying business activities within 2 years from the date upon which the certificate of registration is issued shall immediately pay to the minister an amount of money equal to
A x B/C
where "A" equals the amount of all tax credits for which tax credit receipts have been issued for the specified issue, "B" equals the capital not utilised for qualifying business activities and "C" equals the total capital raised from the specified issue.
Qualifying business activities
6. (1) A qualifying business activity includes
(b) research and development;
(d) forestry and agrifoods;
(h) import replacement;
(i) tourism; or
industries in the province.
(2) Notwithstanding subsection (1), a qualifying business activity shall not include
(a) wholesale and retail trade;
(b) food establishments or establishments that hold a licence issued under the Liquor Licensing Regulations made under the Liquor Control Act ;
(c) personal services, business services, professional practices and trades, unless all or substantially all of those services relate to tourism activities or export or import related activities that the minister may determine;
(d) real estate marketing and development;
(e) oil and gas development and production;
(f) mineral resource exploration;
(g) financial services;
(h) fish harvesting and primary fish processing except the processing of underutilized species that the minister may designate; or
(i) an activity that, in the opinion of the minister is not in keeping with the spirit or intent of the program governed by these regulations.
(3) In subsection (2), "food establishment" means a restaurant, snack bar or other place where food is served, prepared, sold or offered for sale.
Constraints on shares
7. (1) An eligible business shall not issue a share of a specified issue unless all of the following apply to that share:
(a) the share is fully paid for in cash;
(b) a right to vote at any meeting of shareholders;
(c) a right to receive dividends declared by the corporation;
(d) a right to participate in the distribution of remaining property of the corporation upon dissolution of the corporation; and
(e) that share, immediately following its issue, is registered in the name of the shareholder that purchased the share.
(2) An eligible business shall not redeem an eligible share where a tax credit receipt has been issued for that share unless that share is redeemed more than 5 years after the date upon which the eligible share was issued.
(3) Rep. by 71/04 s4
Prohibited use of funds
8. An eligible business shall use capital raised through the specified issue for the qualifying business activities specified in the application made under section 3 and the capital shall not be used for any of the following purposes:
(b) payment of dividends;
(c) share purchases or share redemption;
(d) payment of debt, debt reduction or refinancing an existing debt;
(e) funding the purchase of any part of a business as a going concern;
(f) funding the purchase of all or substantially all of the assets of a previously existing proprietorship, partnership, joint venture, trust or company except where that firm is in receivership or bankruptcy; or
(g) the purchase of assets or services by the eligible business for a price greater than the fair market value of the asset or service.
Application for tax credit certificate
9. (1) An eligible business shall, not more than 30 days after the expiration of the specified period apply to the minister on behalf of each eligible investor who has acquired eligible shares during the calendar year or not more than 60 days after the start of the next calendar year, for a tax credit receipt with respect to a tax credit to be claimed by the eligible investor under these regulations.
(2) An application under subsection (1) shall be made in the required form and shall be signed by 2 authorized officers of the corporation that has issued the eligible shares for which a tax credit receipt is sought and shall be accompanied by additional information that the minister may require.
(3) The amount of tax credit that may be claimed each year on behalf of an eligible investor is
(a) for a qualifying business activity occurring in the North East Avalon area, equal to 20% of the purchase price of the eligible shares;
(b) for a qualifying business activity occurring in the province outside the North East Avalon Area, equal to 35% of the purchase price of the eligible shares; or
(c) for a qualifying business activity occurring within both areas referred to in paragraphs (a) and (b), a tax credit rate that the minister may determine to be a reasonable proration of the rates under those paragraphs.
(4) Where the minister receives an application under subsection (1), he or she shall issue a tax credit receipt to the eligible investor indicating the amount of the tax credit and the taxation year for which that credit may be claimed but a tax credit receipt shall not exceed $50,000.
(5) Notwithstanding subsection (4), the minister shall not issue a tax credit receipt unless he or she is satisfied that
(a) the eligible business or its directors, officers or shareholders are not conducting the affairs of that business in a manner that is contrary to the Act and the regulations or to the spirit of the Act and the regulations;
(b) the eligible shares related to the tax credit do not entitle the holder upon acquisition of those shares to
(i) claim a deduction from income under the Act or the federal Act, other than a deduction under subsection 146(5) of the federal Act, or
(ii) receive other financial assistance from a government, municipal or public authority;
(c) a tax credit has not been previously allowed under the Act with respect to eligible shares to which the tax credit receipt relates;
(d) the eligible shares related to the tax credit receipt were purchased and acquired directly from the corporation that issued the eligible shares; and
(e) there has been compliance with all requirements of these regulations.
Liability of officers and directors
10. Where an officer or director of an eligible business permits or acquiesces to a transaction, event or a series of transactions or events that he or she knew or ought to have known would cause the certificate of registration to be revoked, that officer or director is jointly and individually liable for the amounts specified in subsections 5(2) and (3).
Recovery where no entitlement
11. Where an eligible investor receives, directly or indirectly, the benefit of all or a part of a tax credit that the eligible investor is not entitled to, the eligible investor shall pay the amount of the benefit to the minister.
Redemption of share
12. An eligible business that redeems an eligible share for which a tax credit has been allowed within 5 years after the date of issue of that share, shall pay to the minister a penalty in an amount equal to the tax credit allowed with respect to the share plus interest at the rate prescribed under the federal Act.
Transfer of credit on winding-up or amalgamation
12.1 (1) Where a corporate investor is wound-up into its parent corporation, or amalgamated,
(a) the shares of the corporate investor are considered not to have been disposed of; and
(b) an unused tax credit is considered to have been acquired by the parent, or amalgamated, corporation.
(2) For the purpose of subsection 13(4), the acquisition by the parent, or amalgamated, corporation is considered to have occurred in the taxation year in which the tax credit was originally issued to the corporate investor.
(3) Where a corporate investor amalgamates with an eligible business from whom it acquired eligible shares of the corporate investor, the eligible shares are considered to have been redeemed.
Non refundable tax credit
13. (1) Where, for a taxation year, an eligible investor has been issued a tax credit receipt, there shall be deducted from the tax otherwise payable by the eligible investor under the Act for that taxation year, the lesser of
(a) the tax otherwise payable;
(b) the amount specified in a tax credit receipt or receipts issued during the year and amounts carried forward or back from another year in accordance with subsection (4); or
(2) An eligible investor who is entitled to a deduction under this section shall file, with the eligible investor's annual return for a taxation year in which a deduction is claimed under this section, a copy of the tax credit receipt to which the deduction relates.
A deduction made under this section may be made with respect to eligible shares acquired and paid for by an eligible investor in the taxation year for which the deduction is claimed or where the eligible shares are acquired not more than 60 days after the taxation year for which the deduction is claimed.
(4) Where an eligible investor has been issued a tax credit receipt under these regulations and the amount specified in the tax credit receipt or receipts issued during the year exceeds the lesser of
(a) the tax otherwise payable; and
the eligible investor may carry forward any unused balance to any of 7 subsequent tax years or carry back the amount to any of 3 preceding tax years, provided that
(c) in the case of an individual investor, it is not carried back to a taxation year that precedes the year 2000; and
in the case of a corporate investor, it is not carried back to a taxation year that ended before
14. (1) An eligible business shall, not more than 90 days after its fiscal year end, prepare and file with the minister the following statements that have been reviewed by a person who is licensed as a public accountant under the Chartered Professional Accountants and Public Accountants Act :
(a) annual financial statements together with a statement that specifies the extent to which capital raised by a specified issue is or has been used for qualifying business activities; and
(b) a statement that shareholders who have been issued eligible shares have not redeemed the shares.
(2) Paragraph (1)(a) shall apply for 2 years after the date upon which the certificate of registration for the eligible business was issued.
(3) Paragraph (1)(b) shall apply for 5 years after the date upon which the eligible shares of the eligible business were issued.
These regulations shall be considered to have come into force on
(Includes Correction published on Jun. 29/01)