Nova Scotia Aims to Supercharge Start-up Growth With Revised Equity Tax Credit – Updated following Spring 2019 Provincial Budget: Corporate Investors Now Eligible

April 15, 2019

On January 17, 2019, Nova Scotia’s Finance and Treasury Board (“NSFTB”) announced changes to the Province’s Equity Tax Credit program, a popular tax credit program that has been in place since 1994 and utilized by many Nova Scotia companies and investors in a number of different industries. This was followed by additional changes in the Nova Scotia budget, which was announced on March 26, 2019.

The Province’s stated goal for re-working the Equity Tax Credit (“ETC”) into the Innovation Equity Tax Credit (“IETC”) is to provide innovative small and medium-sized businesses with more funding opportunities, and provide strong incentives for investors to take part. This is a big step in the right direction, as the legislation puts Nova Scotia on equal, if not better, footing with its Atlantic counterparts.

Existing Scheme

According to the NSFTB, the ETC was “designed to assist Nova Scotia small businesses, co-operatives and community economic development initiatives in obtaining equity financing by offering a personal income tax credit to individuals investing in eligible businesses.” Over the years, the ETC program fell behind similar programs implemented by the other Atlantic Provinces.

In Newfoundland and Labrador, investors currently enjoy a 20% provincial tax credit on investments of up to $250,000 made in St. John’s, and 35% everywhere else in that Province. In P.E.I., the credit is a provincial tax credit of 35% with a $100,000 limit, and New Brunswick offers a 50% credit on investments up to $250,000. Before the changes, Nova Scotia offered a comparatively meagre 35% credit on a maximum investment of $50,000.

According to the Minister of NSFTB, Karen Casey, the government’s intention in making changes is to “narrow the scope of the current equity tax credit and to increase the threshold”, with the anticipated result of making Nova Scotia more competitive, both with its neighbours and competitors further afield.

Though the fundamentals of the ETC remain largely untouched, there are some important changes that should be noted by both investors and companies looking to take advantage of the revised scheme.


i) Investment Amount

Effective immediately, the IETC will apply to investments of up to $250,000 in eligible businesses, which is $200,000 more than previously allowed. This provides individuals who wish to invest in an eligible Nova Scotia business with a tax credit of up to $87,500, a significant increase from the previous maximum of $17,500 (based on a 35% credit). Further, investments in the life sciences and ocean technology sectors, are now eligible for a 45% credit of up to $112,500.

ii) Businesses

In order to be eligible under the IETC, businesses must pay 50% of their wages in Nova Scotia, which is an increase from the ETC, which only required 25%. The total value of an eligible firm’s assets has also been lowered, from $25,000,000 to $15,000,000.

The IETC also only applies to investments in companies incorporated within the 10-year period preceding the application date, and the companies must be “developing or implementing new technologies or applying existing technologies in a new way to create new products, services or processes.”

Further in line with the province’s desire to push investment toward the new economy, eligible businesses must not engage in construction, real estate, hotel ownership or management, retail, food and beverage services, oil and gas, film, digital animation, digital media, membership-based recreational activities, financial services, or insurance services, as their principal business (some of these industries have their own specific tax credit program).

iii) Investment

The IETC has expanded the scope of possible investments that can be made by investors who want to claim the tax credit. Under the ETC, eligible businesses could only issue non-redeemable, non-convertible, fully paid, voting common shares. In addition to common shares, the IETC permits the issuance of preferred shares and convertible instruments, subject to some limitations and restrictions on redemption and payout.

Forms of Investment

Convertible instruments have become a common investment vehicle for many of Nova Scotia’s start-ups. As a debt instrument, they can be converted into equity upon certain triggers as specified in the terms. Start-up financing rounds can quickly become complex and take up significant time and money. Convertible instrument financings tend to be faster, simpler, and cheaper to accomplish than equity rounds because they often avoid the need for an immediate valuation of the company in order to price the sale of equity and can sometimes be done without offending the terms of shareholder agreements or any pre-emptive rights existing shareholders may have.

Preferred shares are also popular since their terms can be drafted to provide many benefits over those of common shares such as preferential dividend rates, rights to be redeemed and rights to participate in the liquidation of a company.

The ability of companies to issue both convertible instruments and preferred shares in the context of the IETC is significant, as it opens up multiple avenues for investors to protect their investment and diversify their holdings, while providing businesses with alternatives in arranging their capital structure.

As was the case with the ETC, the IETC requires that funds raised under the IETC program may only be used for active business activities or to invest in shares of a corporation or association that would, if that corporation or association made application pursuant to the legislation, be an eligible business. The use of investment proceeds is restricted and cannot be used for, among other restricted uses, lending, purchasing shares (other than shares in other eligible businesses), paying dividends or repaying shareholder debt to a director, shareholder or officer of the business (or their associates).

iv) Investors

Like the ETC, three or more investors must invest in an eligible business. Under the ETC, an eligible investor had to be an individual and a resident of Nova Scotia who is at least 19 years old. Effective April 1st, 2019, the IETC expanded the category of eligible investors to include corporations resident in Nova Scotia. Residency is determined by whether the investor is required to pay income tax under the Income Tax Act (Nova Scotia) in the tax year in which the investor claims the tax credit. However, if an individual investor seeks to invest in a convertible instrument, she/he must not be a director or a specified shareholder (as defined in the federal Income Tax Act) of the company receiving the investment.  Regulation to implement corporate investor rules are expected in Spring 2019.


In conclusion, the Province’s stated goal for re-working the Equity Tax Credit (“ETC”) into the Innovation Equity Tax Credit (“IETC”) is to provide innovative small and medium-sized businesses with more funding opportunities, and provide strong incentives for investors to take part.

By meeting the needs of Nova Scotia’s start-up businesses to take advantage of opportunities to raise investment from corporate investors, the Province has eased the path to capital. While the increase in the size of the available credit and the investment vehicles will no doubt be welcomed by eligible Nova Scotia businesses, the hunt for risk capital to build a business is an increasingly global endeavour and the next step may be to explore opening up the IETC to investors that are not resident in Nova Scotia.

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