EBC’s – Important Notice- Budget Update.

On Feb 12th, Rick Manifold from the BC Investment Capital Branch sent out word to all the EBC’s that until March 1, 2009 investors can get 2008 refundable tax credits for their investments in eligible BC businesses!   Eligible business owners are strambling to drum up some investments given this significant investor incentive but is it too late….

This should really be a no brainer investment if you can find the right eligilbe company to invest in… therein lies the problem.  

Here’s how the program works:

  1. Find an eligible  BC tech startup- (there should be a published list somewhere?) (or a fund like WUTIF or Bootup Labs VCC) and determine whether you can invest- friends & family exemption, accredited investor, Offering Memorandum, etc.
  2. Determine merits of the investment- how, when and how much money will you get back… this can be risky in which case you may want to look at Wutif or Bootuplabs which will diversify this risk and keep a sophisticated investor team evaluating the merits of the investments.  Both have very low management fee structures (will work on a comparison table for a future blog entry).
  3.  Pay for your investment ex. $10,000 (but consider doing it through your self-directed RRSP) for a kicker return.  If you had a good 2008 and were at the top tax bracket (example over 123k salary) this RRSP investment will yield a $4,370 tax refund.
  4.  Get your EBC/VCC tax credit which is a 30% refundable tax credit or a further $3,000 refund on a 10k investment.

So your net investment is $2,630 for a $10k investment… wow!

But it doesn’t stop there!  Eligible Tech startups are generally eligible because they are developing technologies that would qualify for the SR&ED corporate tax incentive program.   So let’s look at how that works in this example.

  1. The Company takes your $10k investment and pays programmers/engineers etc. to help develop the technology.  
  2.  The Company files a tax return and a claims for the Federal and BC SR&ED tax credit which can generate up to $6,847.50 (assuming Proxy space is available) of additional refundable tax credits to the Company.

Let’s recap- you spend a net out of pocket $2630 which provides your investee company $16,847.50 of cash to build technology that can be then marketed and sold generating a return on your investment!  

You will have to hold this investment for a minimum of 5 years but that is the typical length of time that would be needed to bring such technology to market anyway.    

Compare this to your $10k mutual fund RRSP investment in the last few years… LOL’s.

  1. $10k immediately followed by your broker’s trailer fee (1.5% per year) plus the Mutual Fund Management fee of 2.5-5% per year…. good start!
  2. They invest the money for you in public Companies that hire professional executive teams to run them.  They take off the top their salaries and incentive programs which have received much notariety over the last 12 months.
  3. At least you have the investment in a liquid market… but wait you’re holding this investment in an RRSP so no real benefit there…?

Morale of the story is more effort needs to go into helping communicate and generate investor awareness for these investment programs.   The public VCC’s which are good at this communication because they can leverage the investment brokerage community but this makes them more expensive to operate and they are investing in later stage businesses, often public companies which cannot capitalize fully on the SR&ED program for example.  

Programs like Bootup Labs and Wutif are helping solving this problem but the securities exemption limitations are precluding average investors from taking advantage of these programs which is very unfortunate.    Accredited investors please setup up.  

Two additional recommendations to open these incentives up to average investors, to help EBC’s get financing and to spread the risk include:

  1. Change the accredited investor rules such that normal investors can invest up to $10k per year without exemption requirements.
  2. Increase the number of shareholders to 100 before a company is deemed to be a “reporting issuer”

Leave a Comment