MOREIRA: Equity tax credit expansion could be spark to innovation
There is quite a simple way to develop innovation in Nova Scotia. It wouldn’t cost a great deal. It’s been proven to work here and elsewhere. It’s been recommended to the current government by one of its leading advisers on economic policy.
It is to expand the current equity tax credit, or ETC.
I understand that discussions of tax credits and the like make people’s eyes glaze over, myself included.
So let me explain that an equity tax credit allows individuals to buy shares in small Nova Scotia companies (less than $25 million in assets) and the government lets these taxpayers subtract 35 per cent of the total from their provincial income tax. The maximum qualified investment they can make in one year is $50,000, allowing them a maximum tax saving of $17,500.
The program has helped to develop some of the leading innovation companies in the province, and it isn’t that expensive. Economic development guru Donald Savoie, in his report, The Way Ahead for Nova Scotia, said it only costs the government about $1.5 million a year in lost revenue. That figure seems low, so it must assume various offsets through increased employment.
The beauty of ETCs is that private investors decide where the investment should be made. They tend to be prudent in their decision, because 65 per cent of the investment is their own money; and they often have broader vision and certainly less political interference than government employees trying to pick good investments.
When Savoie filed his report on the Nova Scotia economy in 2010, he recommended Nova Scotia raise the limit to $250,000 from $50,000 to encourage more investment in innovation.
There are similar pressures on the New Brunswick government to do likewise, and there are calls from various groups to establish a regional ETC, so a taxpayer would get a tax break for investing in any of the four Atlantic provinces.
These are all great ideas, and it would be wonderful if any or all of them were implemented. But we need more, far more, for the innovation industry in Nova Scotia and the region overall. The thirst for capital among young companies is simply growing in ways we haven’t addressed in terms of policy.
The success of innovative companies like Radian6 and Q1 Labs of New Brunswick and Unique Solutions and GoInstant of Nova Scotia has excited the entrepreneurial hordes. More companies are being created than before. And that means more seed capital and follow-on investment will be needed than in the past.
The indications are that the Nova Scotia government will eventually follow through on Savoie’s recommendation to raise the limit on investment to $250,000 from $50,000. And that will be a good start, but only a start.
The province — the region really — needs a broader discussion on using the tax system to encourage investment in growing companies. It needs not only a larger number, it needs to be more practical, more flexible and more imaginative.
What do I mean by practical?
I mean the system needs to meet the requirements of the modern business community. To benefit from an equity tax credit, an investor must retain his investment in a company for five years. Sounds reasonable, except that a really good company can often find a buyer in less time than this, meaning the revenue department could choose to claw back the investment if the company exits in less than five years.
Loosening that restriction would make investments more attractive.
By flexibility and imagination, I mean Nova Scotia needs to find ways to seek investment from a broader group than simply Nova Scotians with the means and courage to back young companies. A regional program of equity tax credits — under which any Atlantic Canadian investing in a qualifying Atlantic Canadian company would receive a tax credit — would certainly help, but it would take some legislative work.
First of all, there are different rules in all the provinces. Newfoundland and Labrador, for example, offers a bigger tax break for investments in rural areas than on the Avalon Peninsula. To have a regional ETC, all four provinces would have to have the same program, and it would not be easy to get the notoriously unco-operative Atlantic provinces to co-operate on a single policy.
Nova Scotia should take the first step, just as it has with the regional venture capital fund. Our government should state that it is willing to broaden its ETC program so tax credits would extend to Nova Scotians investing in qualifying Atlantic Canadian businesses, not just those in Nova Scotia. However, it is only willing to do so if the other provinces adopt similar tax policies.
These are just a few ideas. Obviously more suggestions, better suggestions, would come forward in a broad-ranging look into reforming the existing equity tax credits. It would certainly be preferable to just increasing the limits or — the least preferable option — just leaving the system as it is.