BC’s Angel Tax Credit and Venture Capital Tax Credit Program

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BC’s Angel Tax Credit and Venture Capital Tax Credit Program

Context

British Columbia was the first jurisdiction in Canada to implement a Small Business Venture Capital program that encourages angel and venture capital investments in early stage companies. It has successfully differentiated British Columbia from other jurisdictions and expanded the pools of available capital in the province.

History Of Small Business Venture Capital Program

The BC Small Business Venture Capital Program was designed to encourage investors to make equity capital investments in eligible small businesses, ultimately providing small businesses with continuous access to early-stage angel and venture capital.

Often referred to as BC’s Angel Tax Credit program, the Small Business Venture Capital Program provides a 30% tax credit to investors making eligible investments. It includes three distinct programs: Laboursponsored Venture Capital Corporations (LSVCC), Venture Capital Corporations (VCC) and Eligible Business Corporations (EBC).

BC Small Business Venture Capital Program Performance

The Small Business Venture Capital Program, and the VCC and EBC programs in particular, has been instrumental in supporting companies that require between $100,000 and several million in capital and has become an essential part of bridging the gap between “friends and family” financing and institutional venture capital financing.

Over the past ten years, the number of angel investments in EBCs and VCCs has more than doubled in the period from 117 investments in 2005 to 245 investments in 2015 (Figure 1). At the same time, the total investment levels have tripled from $32 million to $107 million.

BC Angel Tax Credit Program BC Tech Paper

A 2010 study1 of the Small Business Venture Capital Program led by Thomas Hellmann of UBC and Paul Schure of University of Victoria summarized the benefits of the program as providing:

  1. Favourable Return on Tax Credits.For every $1 of provincial tax credits issued through the Small Business Venture Capital Program, recipient companies generated $1.98 in provincial taxes. For every $1 of Canadian tax credits issued, the recipient companies generated $2.92 in Canadian taxes. In essence, the tax multiplier for the Small Business Venture Capital Program is 1.98x provincially and 2.92x federally.
  2. Employment and Revenue Growth.Companies in the program generated an average of 2.43 new jobs per year and grew revenue by $572k.

Key Considerations

The success in the BC Angel Tax Credit program has given rise to several issues in recent years:

  1. Limitations on Individual investor levels.Robust startup activity combined with growing levels of support from accelerators and incubators is leading to an increasing number of early stage companies seeking angel investment. This has translated into more investment from individual angel investors, often resulting in challenges with respect to the annual contribution limit of $200,000 per individual investor, where the individual may wish to invest well in excess of her or his $200,000 annual limit, but is dissuaded from doing so because of the annual contribution limit, leaving the company underfunded.
  2. Multiple angel rounds.Over the past several years, many tech companies have turned to raising multiple rounds of angel investment to fund their expansion efforts. This has led to many situations in which companies regularly exceed the $5 million maximum EBC credit and consequently create Venture Capital Corporations (VCCs – which allow for a $10 million maximum) with the specific intent of overcoming the EBC limit and accommodating more angel investment. Although permitted by the program, the amount of additional cost resulting from the administrative overhead, legal and accounting costs associated with creating and then administering a VCC means that capital which could otherwise be used by tech companies for working capital is redirected to non-productive areas.
  3. Longer Investment horizon.The time period between the creation of new venture and the opportunity for the early investors to obtain liquidity typically exceeds the five year tax carry forward period available to corporate investors which participate in the BC Angel Tax Credit program. This has the effect of rendering the tax credit of little or no use and limiting it as an incentive for corporate investors to invest in early stage and emerging technology companies.

Key Recommendations

The Small Business Venture Capital Program is a cornerstone to the financing strategy of early stage and emerging technology companies in British Columbia and requires only some modest changes to increase the efficiency of how it is used to deploy capital. We propose the following recommendations to further extend the effectiveness and efficiency of the program:

  1. Eliminate the annual contribution limit of $200,000 per individual investor.
  2. Increase the maximum EBC credit for a corporation from the current $5 million maximum to a $10 million maximum (to be the same as a Venture Capital Corporation).
  3. Extend the tax carry forward period for corporate investors from 5 to 10 years.
  4. Actively partnering with the federal government to encourage a federal venture capital program based on the BC model.This would have the benefit of allowing for more inter-provincial capital flows, freeing private capital from the sidelines and ultimately allowing companies to raise larger pools of capital. Moreover, if the Federal Government provided a 15% credit, matched by Provinces that wished to do so, BC’s existing pool of tax credits would be effectively doubled.