A Comprehensive Guide for Startups and Small Businesses
Attracting investment is one of the biggest challenges that startups and small businesses face, especially when developing new products, expanding operations, or entering competitive markets. To encourage private investment in innovative businesses, the Government of Nova Scotia offers the Innovation Equity Tax Credit (IETC)—a program designed to reduce investor risk and increase funding opportunities for eligible businesses.
This guide provides everything you need to know about the IETC, including how it works, eligibility criteria, benefits for businesses and investors, step-by-step instructions on how to apply, and key strategies for leveraging this tax credit to secure investment funding for your business.
What Is the Nova Scotia Innovation Equity Tax Credit (IETC)?
The Nova Scotia Innovation Equity Tax Credit (IETC) is a provincial tax incentive program that encourages investment in small and medium-sized businesses engaged in innovative industries. The program allows individuals and corporations to claim a non-refundable tax credit when they invest in qualifying Nova Scotia businesses.
The primary objectives of the IETC are:
✅ Encouraging private investment in Nova Scotia-based startups and small businesses.
✅ Reducing the risk for investors by offering a financial incentive.
✅ Supporting innovation and economic growth by helping businesses secure the capital they need.
✅ Enhancing the competitiveness of Nova Scotia businesses in national and international markets.
By offering tax credits on eligible investments, this program makes it more attractive for investors to fund local startups and small businesses. This, in turn, provides companies with the necessary capital to develop new technologies, expand their operations, and create jobs in the province.
How the IETC Works: Understanding the Tax Credit
The IETC provides a percentage-based tax credit to investors who make equity investments in eligible businesses. The rate of the tax credit depends on the type of investor and the business sector:
📌 For Individual Investors:
- Standard Rate: 35% of the eligible investment.
- Enhanced Rate: 45% for investments in businesses operating in the ocean technology or life sciences sectors.
📌 For Corporate Investors:
- Flat Rate: 15% of the eligible investment.
📌 Maximum Annual Tax Credits:
- Individual investors can claim up to $87,500 per year at the standard 35% rate or $112,500 at the enhanced 45% rate.
- Corporate investors can claim up to $75,000 per year at the 15% rate.
📌 Maximum Annual Investment Amounts:
- Individuals can invest up to $250,000 per year in eligible businesses.
- Corporations can invest up to $500,000 per year.
Since the IETC is a non-refundable tax credit, investors cannot receive cash refunds for unused credits. However, unused tax credits can be carried forward for up to seven years or carried back three years.
Business Eligibility Requirements: Who Can Apply?
To qualify for the Innovation Equity Tax Credit, a business must meet several strict eligibility criteria. These ensure that the program benefits innovative, high-growth businesses that contribute to Nova Scotia’s economic development.
📌 Business Structure & Registration
✔ Must be a Canadian-controlled private corporation (CCPC).
✔ Must be a taxable Canadian corporation.
✔ Must be registered and headquartered in Nova Scotia.
✔ Must conduct active business operations within the province.
📌 Business Age & Size
✔ Must be incorporated for less than 10 years.
✔ Must have less than $15 million in assets, including those of associated corporations.
✔ Must have fewer than 100 employees (including associated corporations).
📌 Industry & Sector Focus
✔ The business must be engaged in developing or applying innovative technologies to create new products, services, or processes.
✔ Special preference is given to companies in the ocean technology and life sciences sectors, which qualify for the higher 45% tax credit rate.
📌 Employment & Compensation
✔ At least 50% of total payroll must go to employees or contractors who are Nova Scotia residents and work at a permanent establishment in the province.
How to Apply for the IETC: Step-by-Step Guide
Applying for the IETC is a multi-step process that involves registration, issuing shares, and submitting tax credit applications for investors. Below is a detailed breakdown of the entire process:
📌 Step 1: Apply for a Certificate of Registration
Before accepting any investment, your business must apply for a Certificate of Registration from the Nova Scotia Department of Finance and Treasury Board. This application must include:
✔ Business incorporation documents.
✔ A detailed business plan outlining your growth strategy.
✔ A description of how your company qualifies as innovative under the program’s criteria.
✔ Proof that your company meets the employment and payroll requirements.
🕒 Processing Time: It may take several weeks for the government to review and approve your application.
📌 Step 2: Issue Eligible Shares to Investors
Once your company is approved, you can begin issuing new common voting shares or convertible debentures to investors. These securities must be issued according to Nova Scotia Securities Act regulations.
💡 Tip: Investors are more likely to invest when they know the tax credit is available, so be sure to promote your company’s eligibility to potential investors!
📌 Step 3: Apply for Investor Tax Credit Certificates
After the investment is complete, your company must apply for tax credit certificates on behalf of investors within six months of the Certificate of Registration’s expiry date. These certificates allow investors to claim the IETC on their income tax returns.
✔ Provide documentation showing the amount each investor contributed.
✔ Submit proof that the shares were legally issued and fully paid.
📌 Step 4: Maintain Compliance & Submit Annual Reports
Your company must submit annual reports for the four years following the expiry of your Certificate of Registration. These reports ensure that your business:
✔ Continues to meet eligibility requirements.
✔ Remains active in the innovation sector.
✔ Uses the raised investment funds appropriately.
🔴 Important: If your business fails to meet eligibility requirements within the four-year period, investors may lose their tax credits, and your company could face penalties.
Why the IETC is a Game-Changer for Nova Scotia Startups
Leveraging the Innovation Equity Tax Credit offers significant advantages for both businesses and investors:
🔹 Benefits for Startups & Small Businesses
✔ Easier Access to Capital – Attract more investors by reducing their financial risk.
✔ Competitive Advantage – The IETC makes Nova Scotia companies more attractive than those in provinces without a similar tax incentive.
✔ Stronger Investor Confidence – The tax credit gives investors an immediate return, encouraging larger investments.
🔹 Benefits for Investors
✔ High Tax Savings – Investors can recover up to 45% of their investment in tax credits.
✔ Encourages Long-Term Investment – Investors must hold shares for four years, leading to business stability.
Final Thoughts: How to Maximize Your Funding Potential
✅ Highlight Your Eligibility – Advertise your eligibility for the IETC to attract more investors.
✅ Work with Financial Advisors – Ensure your business meets all regulatory requirements.
✅ Network with Angel Investors – Connect with investment groups actively looking for tax-incentivized opportunities.
🚀 Ready to Apply? Visit the Nova Scotia Department of Finance and Treasury Board website for official application forms and guidelines.