Halifax accountant James D. Nicoll is gathering support for a regional equity tax credit that doesn’t involve legislation from the four Atlantic Provinces.
Instead, he is asking the federal government to handle it.
“What we’re trying to do is create a unified incentive to get money into the innovative companies that are the growth engine of the region,” said Nicoll, the Vice-President Deals at PricewaterhouseCoopers in Halifax.
Here’s the problem: Each province now grants equity tax credits, or ETCs, usually worth 35 percent to individuals if they invest in private companies within that province. So if for example a New Brunswicker invests $50,000 in a New Brunswick startup, he or she will receive a provincial tax credit of $17,500. The taxpayer gets a break, and in theory a growing company (handpicked by a knowledgeable investor) receives money to hire staff, develop its product, etc.
It’s a great system, but for one thing. The program doesn’t apply if an investor from one province invests in another province. With fewer than 1 million people in each Atlantic province, the result is a puny pool of capital to draw from, which puts Atlantic Canadian companies at a disadvantage to those in more populous provinces.
Investors and entrepreneurs desperately want the four governments to allow a regional ETC so investors would gain the credit as long as they back a qualifying company headquartered in the region. So far, there’s been no movement.
So Nicoll is proposing a change to the Federal tax code to create a regional ETC, assuming quite reasonably it’s easier to get one government to move than four.
“On economic development, the provinces compete with each other,” said Nicoll. “On this proposal, they don’t compete.”
Under Nicoll’s plan, the provincial governments would still write the rules on ETC investments within their province, and individuals investing within their home province would still receive a provincial ETC. The new part is that people investing in a company based in a different Atlantic Province than their own would apply for a federal – not provincial – tax credit. That portion would cost the Feds money, but Ottawa could fund it by using the unclaimed portions of the Atlantic Gateway funding. The key to winning acceptance, he said, is to “draw on a budget that is already allocated.”
Nicoll said his proposal would be structured similarly to the statute creating the labour-sponsored venture capital funds, which is a capital-raising vehicle that affects both federal and provincial coffers.
What the provinces may choose to do is unify their limits for qualified investments. New Brunswick now has a limit of $250,000, Nova Scotia and Newfoundland and Labrador $50,000 and P.E.I. $20,000.
So far he has spoken to a few federal politicians about the proposal and received favorable feedback. He’s also spoken to investors and entrepreneurs in most of the provinces to begin to get support for the idea.
The timing of the proposal is good because Nova Scotia, New Brunswick and Prince Edward Island have just agreed to fund the regional venture capital fund, and the federal government has signaled a strong interest in funding commercial innovation – especially when it’s backed by private funds.
Nicoll hopes there could be some headway in Ottawa by next fall.
There’s one final layer to Nicoll’s plan that could prove controversial. He believes it should apply to corporate as well as personal taxes. He explained that accredited investors – generally those with more than $200,000 in income and or $1 million in assets – often own businesses, and those businesses tend to have cash on their balance sheet. He believes the economy would benefit to draw that money out of those established companies and into young, growing companies.
“The more we can do for emerging companies, the more sources of capital that we can incentivize, the better off we are.”