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Two new venture capital tax credit investment programs to stimulate the growth of small businesses and new jobs in expanding areas of the economy throughout the province were announced today by Ernie McLean, acting Minister of Development and Rural Renewal, and Lloyd Matthews, Minister of Finance.

The ministers announced a new Direct Equity Tax Credit program and a new Labour Sponsored Venture Capital Tax Credit program, both of which were developed as a result of recommendations made during public consultations held by the Cabinet Committee on Jobs and Growth.

"Access to venture capital was repeatedly identified during the jobs and growth consultations as key to business growth. The consultations also highlighted the extraordinary challenge of raising venture capital in rural areas, and the need to target government programs accordingly," said Mr. McLean, who participated in the public consultations as a member of the Cabinet Committee.

The intention to introduce a venture capital tax credit program was announced in the Budget in March, at the same time that the Interim Report on Jobs and Growth was released, and other measures to stimulate the growth of small businesses were announced.

Mr. McLean said that further consultations held with the private sector following the release of the interim report "pointed to the need for two venture capital investment programs, instead of one, in order to address the diverse needs of the business community in all regions of the province. We are very pleased to be able to make this announcement on the heels of Small Business Week, a week when we give special recognition to the army of entrepreneurs who make such a significant contribution to creating a stronger and better Newfoundland and Labrador."

Mr. Matthews said the two new incentive programs "are among the most aggressive in the country, in keeping with the need for this province to create a highly attractive and competitive overall business investment climate."

"During the jobs and growth consultations we were told over and over that one of the keys to continuing the economic momentum that has been building in our province is for government to create the right environment to attract new investment and keep business competitive," Mr. Matthews said. "We took the recommendations we received seriously, because we support the view that the private sector is the engine that drives our economy."

The Direct Equity Tax Credit program is effective immediately. It will provide a tax credit of 20 per cent for private investors who make a direct investment in an eligible business on the North East Avalon, and 35 per cent to investors who make a direct investment in an eligible business in the remainder of the province.

The Labour Sponsored Venture Capital Tax program is expected to be operational early in 2001. Under this program, a provincially designed venture capital corporation will be selected through a public call for proposals that will be issued in the near future. The designated venture capital corporation will be authorized to offer a 15 per cent provincial tax credit, combined with a 15 per cent federal tax credit, to individuals who are prepared to invest in the corporation. The designated corporation will then reinvest the pool of funds raised in eligible small businesses in the province. The designated venture capital corporation will be required to seek sponsorship by an organized labour group in order to avail of the tax credits. This is designed to foster a closer working relationship between business and labour in growing the economy. Government will also give preference in the selection process to venture capital corporations that target at least 50 per cent of its investments in areas outside the North East Avalon.

Both programs will target companies engaged in small business in growing areas of the economy, such as information technology, aquaculture, forestry and agrifoods enterprises, dimension stone, manufacturing and processing, export-oriented businesses, advanced technologies, tourism, and cultural industries.

The new programs will complement other measures taken by government earlier this year to stimulate growth of the small business sector, including the easing of the payroll tax for small businesses, and the introduction of two new small business assistance programs in the Department of Development and Rural Renewal.

Media contacts: Josephine Cheeseman Development and Rural Renewal (709) 729-4570 Lynn Barter Finance (709) 729-0329

Program information contacts: Department of Finance (709) 729-2983; e-mail TaxPolicy@mail.gov.nf.ca; Department of Development and Rural Renewal (709) 729-7000, or contact one of the department's offices throughout the province.

VENTURE CAPITAL TAX CREDIT INITIATIVE

1. What is venture capital?

Venture capital, also known as risk capital, is money put up by investors to fund a new company or an expansion of an established company. The investor's money is used as equity by the company to grow the business and eventually to provide a return or profit to the investor. Venture capital is usually very "patient" money where investors are prepared to leave it in the company for a considerable period of time to give the company a chance to grow and succeed.

2. Why are tax credits needed to encourage investors to put their money into these ventures?

The start up of a new business or an expansion of an existing one is very risky, especially for small businesses in new emerging areas of the economy. Entrepreneurs often have difficulty finding the capital they need to get their businesses up and running or expand them as they start to grow. Tax credits reduce the financial risk to investors and thereby provide an incentive for them to put their money into companies that are in need of start up or expansion funds.

3. What prompted government to introduce this new initiative at this time?

In the jobs and growth consultations, entrepreneurs, communities and industry groups told us that new ways must be found to get more investment capital in the hands of entrepreneurs in order to grow the economy, especially in small businesses and in rural areas. Government was encouraged in the consultations to look at venture capital tax incentives as a way of achieving this - a way of creating a more attractive investment environment for the private sector to meet its own investment capital needs - rather than relying on government to do this directly.

4. Why is the focus on "small business" in this new initiative?

In the jobs and growth consultations, the small business sector was identified as a major area of the economy whose potential has yet to be fully tapped, especially in rural areas. Small businesses are a vital part of our economy - they make up about 95 per cent of all business enterprises that exist in Newfoundland and Labrador and create more jobs each year in Canada than any other sector of the economy. Targeting the small business sector for support has the potential to make a real difference in virtually all areas of the province.

5. What are the venture capital tax credit programs?

There are two programs.

There is a Direct Equity Tax Credit Program that will come into effect immediately. This program will provide a tax credit equal to 20 per cent of the investment made directly by an individual in an eligible businesses located in the North East Avalon area, and a 35 per cent tax credit to investors who make a direct investment in an eligible business in the remainder of the province.

There is also a Labour Sponsored Venture Capital Tax Credit Program that will come into effect early in 2001. The Department of Finance and the Department of Development and Rural Renewal, following further consultation with organized labour, will issue a Call For Proposals from proponents interested in being registered locally as a venture capital corporation under the program. A 15 per cent provincial tax credit will be offered to individuals who invest in the corporation as part of this program, matched by a 15 per cent federal tax credit, for a combined tax credit of 30 per cent. The mandate of the successful venture capital corporation will be to reinvest the pool of funds it raises from individuals in eligible businesses throughout the province. Preference will be given in the Call for Proposals to a venture capital corporation which targets at least 50 per cent of its investments in areas outside the North East Avalon area.

6. Why are two venture capital tax credit programs needed?

Following the announcement in the March 2000 Budget and the Interim Report on Jobs and Growth that a venture capital tax credit program would be introduced, consultations on program design were carried out with representatives of the business community. This revealed a demand for two initiatives to meet the diverse needs of both investors and the private sector.

From an investor point of view, there are individuals who are interested in making direct investments in a company and in taking on an active management role in the company. These individuals often are more experienced or mature investors and who are prepared to invest in the higher risk category of new start-up companies. Hence the rationale for a "direct" investment program.

From a company point of view, access to both a pooled source of venture capital and individual investors is needed. A "pool" of capital offers a potentially larger amount of investment for a company than single investors may be able to provide, which is attractive as a company enters an aggressive expansionary period, and also provides access to specialized professional management skills that may be needed by a company. Additionally, a "pool" is often easier for inexperienced entrepreneurs to access than attempting to find the right individual investor. Hence the rationale for a "pooled" venture capital corporation type of program.

7. What does "labour sponsored" mean in the Labour Sponsored Venture Capital Tax Credit Program?

It means that a labour organization must sanction or "sponsor" the establishment and operation of the venture capital corporation, including its investment policies. The intent is to encourage a more active partnership between labour and business in growing the economy. The other benefit of having the investment fund "sponsored" by labour is that it triggers a 15 per cent tax credit from the federal government in addition to the provincial tax credit. This allows the provincial tax credit to go a lot further in helping meet the venture capital needs of businesses than if the province had to go it alone.

8. How will a provincial labour sponsored venture capital corporation be selected andwhat are the expected time lines?

A request for proposals from potential venture capital corporations will be issued within the next month or so following further consultation with organized labour on the criteria and guidelines. Based on an assessment of the proposals received, the venture capital corporation which best meets the criteria and guidelines will be selected by government and granted permission to raise investment funds within the province with the benefit of a provincial tax credit for the investors. It is expected that the entire process will take several months to complete. The successful venture capital corporation should be up and running early in 2001.

9. Who will be eligible for a venture capital tax credit?

The credit will be available to any resident of Newfoundland and Labrador over 18 years of age who invests in an eligible business.

10. What criteria must be met for a business to be considered an eligible business under these programs?

In order to qualify as an eligible business, a corporation must:

- be a Canadian-controlled entity; - have a permanent establishment in Newfoundland and Labrador; - be a small business with less than $10 million in assets and fewer than 50 full time equivalent employees; - have at least 75 per cent of salaries and wages paid in Newfoundland and Labrador; - not be a publicly traded company; and - be engaged in and utilize funds for qualifying business activities.

11. What kinds of business activities must a company be engaged in to qualify under the programs?

The programs are designed to support small businesses in growing areas of the economy, such as information technology, aquaculture, advanced technologies, dimension stone, manufacturing and processing, value added resource-based enterprises (forestry and agrifoods), tourism, export oriented services, and cultural industries. Considerable flexibility will be adopted to ensure that legitimate proposals are considered if they meet this fundamental test. However, businesses engaged in the following areas will not be eligible: wholesale, retail, food and beverage services, real estate, professional practices and trades, oil/gas/mineral exploration, financial services, fish harvesting, primary fish processing (except for underutilized species as designated by the Minister of Fisheries and Aquaculture), and other enterprises which do not meet the spirit and intent of the initiative.

12. Are there any restrictions on how the investment funds can be used by an eligible company?

Yes. The tax credits being provided are intended to finance the start up, modernization, expansion or growth of an eligible small business. They will not be permitted to go toward activities that do not meet these objectives, such as simply retiring old debt in a company or to refinance or purchase an existing company or to pay out existing shareholders of a company. The tax credits must create new wealth and activity in a business.

13. What is the rationale for excluding certain businesses and business activities from the program?

The purpose of the program is to encourage incremental business activity in key sectors of the economy. Targeting the program to growth sectors and to those businesses with the greatest capital-raising challenges enables the province to get the biggest bang for its tax dollars.

14. Are there any fund-raising limits or caps under the programs for the eligible businesses?

Yes. There is a fund-raising cap of $700,000 per eligible company in the Direct Equity Tax Credit Program and $1.4 million in the Labour Sponsored Venture Capital Tax Credit Program. These limits are designed to ensure the benefits of the programs are available to as many companies as possible without compromising the needs of the small business community. Based on the consultations held, the caps are high enough to meet the needs of most start up and expanding small businesses in the province.

15. What is the application process under the Direct Equity Tax Credit Program for an eligible business?

An eligible business must make application to the provincial Department of Finance to obtain a Certificate of Registration. A simple application form will need to be filled out. Approval of most applications can be expected within two weeks, provided the requested information in the application form is complete. The Certificate of Registration will then authorize the business to go out and raise the approved amount of investment capital with the benefit of the provincial tax credit as an incentive.

16. How does an investor under the Direct Equity Tax Credit Program actually receive his/her tax credit?

Tax credit receipts to individual investors will be issued by the provincial Department of Finance upon receiving investor documentation from the eligible business that has a Certificate of Registration. The tax credit receipt must then be submitted with the individual's T1 Income Tax return for the applicable tax year. Individual investors will be required to keep their investment in the company for a minimum of five years. If an investment is withdrawn within this five-year period, the individual will be required to repay the tax credits earned. This five year holding period is intended to ensure that the investment funds have a chance to work for the benefit of the company.

17. How do people obtain more information on the venture capital tax credit programs?

Additional information, including application forms, may be obtained by contacting:

Department of Finance Tax Policy Division 
Government of Newfoundland and Labrador 
P.O. Box 8700 St. John's, Newfoundland 
A1B 4J6 
Phone: (709) 729-2983 
Fax: (709) 729-2070 
E-mail: taxpolicy@mail.gov.nf.ca

2000 10 30 11:05 a.m.