Alberta has recently joined British Columbia in offering tax incentives for investors in the eligible small businesses. The legislation is similar in both provinces and both offer 2 investment tracks:
- VCCs resemble self-directed “investment clubs” – typically started by groups of angel investors.
- EBCs are formed by eligible small business to all them to offer similar incentives to interested, arms-length investors.
VCCs – venture capital corporations – are formed by investors who wish to invest in eligible small businesses. So, in the unlikely event that your small business is approached by a VCC, your business doesn’t need to explicitly register for the program.
Small businesses who are seeking investors and wish to offer a tax incentive to investors, may also register under BC’s Small Business Venture Capital Act – or the new Alberta equivalent – as an “eligible business corporation”.
Typically we would advise that you first identify an investor before you register as an EBC. Your investor may prefer convertible debt – which doesn’t qualify for the tax credit anyway, or may like specific features or rights attached to the shares, In other words, paying a lawyer first to create a share structure, and then paying again to modify that same structure, seems like a pointless exercise.
Simply put, it is difficult to anticipate an individual investor’s preferences in terms of structuring. The chances of getting arm’s-length investors early on is relatively low. It doesn’t really make sense to build a capital structure to suit a “prototype” investor when angel investors tend to be very idiosyncratic. In other words it makes more sense to build the structure to suit the investor than the other way round.