Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.))

PART X.3Labour-sponsored Venture Capital Corporations

Marginal note:Definitions

• 204.8 (1) In this Part,

  annuitant

  annuitant has the meaning assigned by subsection 146(1); (rentier)

  eligible business entity

  eligible business entity, at any time, means a particular entity that is

  • (a) a prescribed corporation, or

  • (b) a Canadian partnership or a taxable Canadian corporation, all or substantially all of the fair market value of the property of which is, at that time, attributable to

    • (i) property used in a specified active business carried on by the particular entity or by a corporation controlled by the particular entity,

    • (ii) shares of the capital stock or debt obligations of one or more entities that, at that time, are eligible business entities related to the particular entity, or

    • (iii) any combination of properties described in subparagraph (i) or (ii); (entreprise admissible)

  eligible investment

  eligible investment of a particular corporation means

  • (a) a share that was issued to the particular corporation and that is a share of the capital stock of a corporation that was an eligible business entity at the time the share was issued,

  • (b) a particular debt obligation that was issued to the particular corporation by an entity that was an eligible business entity at the time the particular debt obligation was issued where

    • (i) the entity is not restricted by the terms of the particular debt obligation or by the terms of any agreement related to that obligation from incurring other debts,

    • (ii) the particular debt obligation, if secured, is secured solely by a floating charge on the assets of the entity or by a guarantee referred to in paragraph (c), and

    • (iii) the particular debt obligation, by its terms or any agreement relating to that obligation, is subordinate to all other debt obligations of the entity, except that, where the entity is a corporation, the particular debt obligation need not be subordinate to

      • (A) a debt obligation, issued by the entity, that is prescribed to be a small business security, or

      • (B) a debt obligation owing to a shareholder of the entity or to a person related to any such shareholder,

  • (c) a guarantee provided by the particular corporation in respect of a debt obligation that would, if the debt obligation had been issued to the particular corporation at the time the guarantee was provided, have been at that time an eligible investment because of paragraph (b), or

  • (d) an option or a right granted by an eligible business entity that is a corporation, in conjunction with the issue of a share or debt obligation that is an eligible investment, to acquire a share of the capital stock of the eligible business entity that would be an eligible investment if that share were issued at the time that the option or right was granted,

  if the following conditions are satisfied:

  • (e) immediately after the time the share or debt obligation was issued, the guarantee was provided or the option or right was granted, as the case may be, the total of the costs to the particular corporation of all shares, options, rights and debt obligations of the eligible business entity and all corporations related to it and 25% of the amount of all guarantees provided by the particular corporation in respect of debt obligations of the eligible business entity and the related corporations does not exceed the lesser of $15,000,000 and 10% of the shareholders’ equity in the particular corporation, determined in accordance with generally accepted accounting principles, on a cost basis and without taking into account any unrealized gains or losses on the investments of the particular corporation, and

  • (f) immediately before the time the share or debt obligation was issued, the guarantee was provided or the option or right was granted, as the case may be,

    • (i) the carrying value of the total assets of the eligible business entity and all corporations (other than prescribed labour-sponsored venture capital corporations) related to it (determined in accordance with generally accepted accounting principles on a consolidated or combined basis, where applicable) did not exceed $50,000,000, and

    • (ii) the total of

      • (A) the number of employees of the eligible business entity and all corporations related to it who normally work at least 20 hours per week for the entity and the related corporations, and

      • (B) 1/2 of the number of other employees of the entity and the related corporations,

      did not exceed 500;

  • (g) [Repealed, 1998, c. 19, s. 51(1)] (placement admissible)

  eligible labour body

  eligible labour body means a trade union, as defined in the Canada Labour Code, that represents employees in more than one province, or an organization that is composed of 2 or more such unions; (organisme syndical admissible)

  labour-sponsored funds tax credit

  labour-sponsored funds tax credit[Repealed, 1997, c. 25, s. 55(1)]

  national central labour body

  national central labour body[Repealed, 1994, c. 7, Sch. VIII, s. 118(2)]

  original acquisition

  original acquisition of a share has the meaning assigned by subsection 127.4(1); (acquisition initiale)

  original purchaser

  original purchaser[Repealed, 1997, c. 25, s. 55(2)]

  registered labour-sponsored venture capital corporation

  registered labour-sponsored venture capital corporation[Repealed, 1997, c. 25, s. 55(1)]

  reserve

  reserve means

  • (a) property described in any of paragraphs (a), (b), (c), (f) and (g) of the definition qualified investment in section 204, and

  • (b) deposits with a credit union that is a member institution in relation to a deposit insurance corporation (within the meaning assigned by subsection 137.1(5)); (réserve)

  revoked corporation

  revoked corporation means a corporation the registration of which has been revoked under subsection 204.81(6); (Version anglaise seulement)

  specified active business

  specified active business, at any time, means an active business that is carried on in Canada where

  • (a) at least 50% of the full-time employees employed at that time in respect of the business are employed in Canada, and

  • (b) at least 50% of the salaries and wages paid to employees employed at that time in respect of the business are reasonably attributable to services rendered in Canada by the employees; (entreprise déterminée exploitée activement)

  specified individual

  specified individual, in respect of a share, means an individual (other than a trust) whose labour-sponsored funds tax credit (as defined by subsection 127.4(6)) in respect of the original acquisition of the share is not nil or would not be nil if this Act were read without reference to paragraphs 127.4(6)(b) and 127.4(6)(d). (particulier déterminé)

  start-up period

  start-up period of a corporation means

  • (a) subject to paragraph (c), in the case of a corporation that first issued Class A shares before February 17, 1999, the corporation’s taxation year in which it first issued those shares and the four following taxation years,

  • (b) subject to paragraph (c), in the case of a corporation that first issues Class A shares after February 16, 1999, the corporation’s taxation year in which it first issues those shares and the following taxation year, or

  • (c) where a corporation files an election with its return under this Part for a particular taxation year of the corporation that ends after 1998 and that is referred to in paragraph (a) or (b), the period, if any, consisting of the taxation years referred to in paragraph (a) or (b), as the case may be, other than the particular year and all taxation years following the particular year. (période de démarrage)

  terminating corporation

  terminating corporation in respect of a particular corporation means a predecessor corporation in circumstances where

  • (a) subsection 204.85(3) applies to a merger of the particular corporation and the predecessor corporation,

  • (b) Class A shares of the particular corporation have been issued to the predecessor corporation in exchange for property of the predecessor corporation, and

  • (c) within a reasonable period of time after the exchange, Class A shareholders of the predecessor corporation receive all of the Class A shares of the particular corporation issued to the predecessor corporation in the course of a wind-up of the predecessor corporation. (société sortante)

• Marginal note:When venture capital business discontinued

  (2) For the purposes of section 127.4, this Part and Part XII.5, a corporation discontinues its venture capital business

  • (a) at the time its articles cease to comply with paragraph 204.81(1)(c) and would so cease to comply if it had been incorporated after December 5, 1996;

  • (b) at the time it begins to wind-up, and for the purpose of this paragraph a corporation is not to be considered to have begun to wind up solely because it discontinues its venture capital business under prescribed wind-up rules;

  • (c) immediately before the time it amalgamates or merges with one or more other corporations to form one corporate entity (other than an entity deemed by paragraph 204.85(3)(d) to have been registered under this Part);

  • (d) at the time it becomes a revoked corporation, if one of the grounds on which the Minister could revoke its registration for the purposes of this Part is set out in paragraph 204.81(6)(a.1); or

  • (e) at the first time after the revocation of its registration for the purposes of this Part that it fails to comply with any of the provisions of its articles governing its authorized capital, the management of its business and affairs, the reduction of paid-up capital or the redemption or transfer of its Class A shares.

• Marginal note:Date of issue of Class A shares

  (3) For the purposes of this Part and subsection 211.8(1), in determining the time of the issue or the original acquisition of Class A shares, identical Class A shares held by a person are deemed to be disposed of by the person in the order in which the shares were issued.

Marginal note:Conditions for registration

• 204.81 (1) The Minister may register a corporation for the purposes of this Part if the corporation’s application for registration was received before March 21, 2013 and if, in the opinion of the Minister, it complies with the following conditions:

  • (a) the corporation has applied in prescribed form to the Minister for registration;

  • (b) the corporation was caused to be incorporated under the Canada Business Corporations Act by an eligible labour body; and

  • (c) the articles of the corporation provide that

    • (i) the business of the corporation is restricted to assisting the development of eligible business entities and to creating, maintaining and protecting jobs by providing financial and managerial advice to such entities and by investing funds of the corporation in eligible investments and reserves,

    • (ii) the authorized capital of the corporation shall consist only of

      • (A) Class A shares that are issuable only to individuals (other than trusts), terminating corporations in respect of the corporation and trusts governed by registered retirement savings plans or by TFSAs and that entitle their holders

        • (I) to receive notice of and, subject to the Canada Business Corporations Act, to attend and vote at all meetings of the shareholders of the corporation,

        • (II) to receive dividends at the discretion of the board of directors of the corporation, and

        • (III) to receive, on dissolution of the corporation, all the assets of the corporation that remain after payment of all amounts payable to the holders of all other classes of shares of the corporation,

      • (B) Class B shares that are issuable only to and may be held only by eligible labour bodies, that entitle each of those shareholders

        • (I) to receive notice of and, subject to the Canada Business Corporations Act, to attend and vote at all meetings of the shareholders of the corporation, and

        • (II) to receive, on dissolution of the corporation, an amount equal to the amount of the consideration received by the corporation on the issue of the Class B shares,

        but that do not entitle them to receive dividends, and

      • (C) any additional classes of shares that are authorized, if the rights, privileges, restrictions and conditions attached to the shares are approved by the Minister of Finance,

    • (iii) the business and affairs of the corporation shall be managed by a board of directors, at least 1/2 of whom are appointed by the Class B shareholders,

    • (iv) the corporation shall not reduce its paid-up capital in respect of a class of shares (other than Class B shares) otherwise than by way of

      • (A) a redemption of shares of the corporation, or

      • (B) a reduction in its paid-up capital attributable to a class of shares for which no shares have been issued in the eight-year period ending at the time of the reduction,

    • (v) the corporation shall not redeem a Class A share in respect of which an information return described in paragraph 204.81(6)(c) has been issued unless

      • (A) if the share is held by the specified individual in respect of the share, a spouse or common-law partner or former spouse or common-law partner of that individual or a trust governed by a registered retirement savings plan, TFSA or registered retirement income fund under which that individual, spouse or common-law partner is the annuitant,

        • (I) a request in writing to redeem the share is made by the holder to the corporation and the information return referred to in paragraph 204.81(6)(c) has been returned to the corporation, or

        • (II) [Repealed, 1997, c. 25, s. 56(4)]

        • (III) the corporation is notified in writing that the specified individual in respect of the share became disabled and permanently unfit for work or terminally ill after the share was issued,

      • (B) there is no specified individual in respect of the share,

      • (C) [Repealed, 1997, c. 25, s. 56(5)]

      • (D) the corporation is notified in writing that the share is held by a person on whom the share has devolved as a consequence of the death of

        • (I) a holder of the share, or

        • (II) an annuitant under a trust governed by a registered retirement savings plan, TFSA or registered retirement income fund that was a holder of the share,

      • (E) the redemption occurs

        • (I) more than eight years after the day on which the share was issued, or

        • (II) if the day that is eight years after that issuance is in February or March of a calendar year, in February or on March 1st of that calendar year but not more than 31 days before that day, or

      • (F) the holder of the share has satisfied such other conditions as are prescribed,

    • (vi) [Repealed, 1997, c. 25, s. 56(7)]

    • (vii) the corporation shall not register a transfer of a Class A share by the specified individual in respect of the share, a spouse or common-law partner of the specified individual or a trust governed by a registered retirement savings plan, TFSA or registered retirement income fund under which the specified individual or spouse or common-law partner is the annuitant, unless

      • (A) no information return has been issued under paragraph 204.81(6)(c) in respect of the share,

      • (B) the transfer occurs more than eight years after the day on which the share was issued,

      • (C) the transfer is to the specified individual, a spouse or common-law partner or former spouse or common-law partner of the specified individual or a trust governed by a registered retirement savings plan, TFSA or registered retirement income fund under which the specified individual or the spouse or common-law partner or former spouse or common-law partner of the specified individual is the annuitant,

      • (D) the corporation is notified in writing that the transfer occurs as a consequence of the death of the specified individual or a spouse or common-law partner of the specified individual,

      • (E) the corporation is notified in writing that the transfer occurs after the specified individual dies,

      • (F) [Repealed, 1997, c. 25, s. 56(9)]

      • (G) the corporation is notified in writing that the specified individual became disabled and permanently unfit for work or terminally ill after the share was issued and before the transfer, or

      • (H) such other conditions as are prescribed are satisfied.

    • (viii) the corporation shall not pay any fee or remuneration to a shareholder, director or officer of the corporation unless the payment was approved by a resolution of the directors of the corporation, and

    • (ix) the corporation shall not make any investment in an eligible business entity with which the corporation or any of the directors of the corporation does not deal at arm’s length unless

      • (A) the corporation would deal at arm’s length with the eligible business entity but for the corporation’s interest as the holder of eligible investments in such entity, or

      • (B) the investment was approved by special resolution of the shareholders of the corporation before the investment was made.

• Marginal note:Corporations incorporated before March 6, 1996

  (1.1) In applying clause (1)(c)(v)(E) in relation to any time before 2004 in respect of a corporation incorporated before March 6, 1996, the references in that clause to “eight” are replaced with references to “five” if, at that time, the relevant statements in the corporation’s articles refer to “five”.

• Marginal note:Deemed provisions in articles

  (1.2) In applying subsection (1) in relation to any time before 2004, to a corporation incorporated before February 7, 2000, if the articles of the corporation comply with subclause (1)(c)(v)(E)(I) (as modified, where relevant, by subsection (1.1)), those articles are deemed to provide the statement required by subclause (1)(c)(v)(E)(II).

• Marginal note:Registration number

  (2) On registering a corporation under subsection 204.81(1), the Minister shall assign to it a registration number.

• Marginal note:Successive registrations

  (3) Where an eligible labour body causes more than one corporation to be registered under this Part, for the purposes of paragraph 204.81(6)(h) and section 204.82, each of those corporations shall be deemed

  • (a) to have issued a Class A share at the earliest time any such corporation issued a Class A share,

  and, where the corporation did not exist at the time referred to in paragraph 204.81(3)(a),

  • (b) to have been in existence during the particular period beginning immediately before that time and ending immediately after the corporation was incorporated, and

  • (c) to have had, throughout the particular period, fiscal periods ending on the same calendar day in each year in the particular period as the calendar day on which its first fiscal period after it was incorporated ended.

• Marginal note:Determination of cost

  (4) For the purposes of this Part, the cost at any time to a corporation of an eligible investment that is a guarantee shall be deemed to be 25% of the amount of the debt obligation subject to the guarantee at that time.

• Marginal note:Registration date

  (5) Where the Minister registers a corporation for the purposes of this Part, the corporation shall be deemed to have become so registered on the later of

  • (a) the day the application for registration of the plan is received by the Minister, and

  • (b) where in the application for registration a day is specified as the day on which the registration is to take effect, that day.

• Marginal note:Revocation of registration

  (6) The Minister may revoke the registration of a corporation for the purposes of this Part where

  • (a) the articles of the corporation do not comply with paragraph 204.81(1)(c) and would not comply with that paragraph if the corporation had been incorporated after December 5, 1996;

  • (a.1) the corporation does not comply with any of the provisions of its articles described in paragraph 204.81(1)(c), except where there would be no failure to comply if the provisions of its articles were consistent with the articles of a corporation that would be permitted to be registered under this Part if it had been incorporated after December 5, 1996;

  • (b) an individual acquires or irrevocably subscribes and pays for a Class A share of the capital stock of the corporation in the period beginning on the 61st day of a calendar year and ending on the 60th day of the following calendar year and the corporation fails to file with the Minister an information return in prescribed form containing prescribed information before April of that following calendar year;

  • (c) an individual acquires or irrevocably subscribes and pays for a Class A share of the capital stock of the corporation in the period beginning on the 61st day of a calendar year and ending on the 60th day of the following calendar year and the corporation fails to issue to the individual before April of that following calendar year an information return in prescribed form stating the amount of the consideration paid for the share in that period;

  • (d) the corporation issues more than one information return described in paragraph 204.81(6)(c) in respect of the same acquisition of or subscription for a Class A share;

  • (e) the financial statements of the corporation presented to its shareholders are not prepared in accordance with generally accepted accounting principles;

  • (f) the corporation fails within 6 months after the end of any taxation year to have an independent valuation of its shares made as of the end of that year;

  • (g) [Repealed, 2000, c. 19, s. 55(1)]

  • (h) the corporation does not pay the tax or penalty payable under section 204.82 by it on or before the day on or before which that tax or penalty is required to be paid;

  • (i) tax was payable under subsection 204.82(3) by the corporation for 3 or more taxation years;

  • (j) the corporation provides a guarantee that is an eligible investment and fails to maintain, at any time during the term of the guarantee, a reserve equal to the cost to the corporation of the guarantee at that time;

  • (k) the corporation pays a fee or commission in excess of a reasonable amount in respect of the offering for sale, or the sale, of its shares; or

  • (l) the corporation has a monthly deficiency in 18 or more months in any 36-month period.

• Marginal note:Notice of intent to revoke registration

  (7) Where the Minister proposes to revoke the registration of a corporation under subsection 204.81(6), the Minister shall, by registered mail, give notice to the corporation of the proposal.

• Marginal note:Idem

  (8) Where the Minister gives notice under subsection 204.81(7) to a registered labour-sponsored venture capital corporation, the Minister may, after the expiration of 30 days after the day of mailing of the notice, or after the expiration of such extended period after the day of mailing as the Federal Court of Appeal or a judge thereof, on application made at any time before the determination of any appeal under subsection 204.81(9) from the giving of the notice, may fix or allow, publish a copy of the notice in the Canada Gazette and, on the publication of a copy of the notice, the registration of the corporation is revoked.

• Marginal note:Voluntary de-registration

  (8.1) Where at any time the Minister receives a certified copy of a resolution of the directors of a corporation seeking the revocation of the corporation’s registration under this Part,

  • (a) the registration is revoked at that time; and

  • (b) the Minister shall, with all due dispatch, give notice in the Canada Gazette of the revocation.

• Marginal note:Application of subsection 248(7)

  (8.2) Subsection 248(7) does not apply for the purpose of subsection (8.1).

• Marginal note:Transitional rules

  (8.3) If a registered labour-sponsored venture capital corporation notifies the Minister in writing of its intent to revoke its registration under this Part, the following rules apply:

  • (a) the corporation shall not, on or after the day the notice is provided to the Minister (referred to in this subsection and subsection (8.4) as the “notification date”), issue any tax credit certificates, other than duplicate certificates to replace certificates issued before that day;

  • (b) section 204.841 does not apply on the discontinuance of its venture capital business;

  • (c) subsections 204.82(1) to (4) do not apply to taxation years of the corporation that begin on or after the notification date; and

  • (d) subsection 204.83(1) does not apply in respect of a period, referred to in that subsection as the “second period”, that ends after the notification date.

• Marginal note:Discontinuance of provincial program

  (8.4) Subsection (8.3) applies to a corporation only if,

  • (a) on the notification date, the percentage determined in respect of the corporation by the following formula is less than 20 per cent:

    A/(B – C) × 100

    where

    A

    is the amount of equity capital received by the corporation on the issue of Class A shares that were issued in the 24 months immediately preceding the notification date and are still outstanding on that date,

    B

    is the total amount of equity capital received by the corporation on the issue of Class A shares that are still outstanding on the notification date, and

    C

    is the amount of equity capital received by the corporation on the issue of Class A shares that, as of the notification date, have been outstanding for at least eight years.

  • (b) the corporation has revoked its registration before the third anniversary of the notification date.

• Marginal note:Right of appeal

  (9) Where the Minister refuses to accept a corporation for registration under subsection 204.81(1) or gives notice of a proposal to revoke the registration of a corporation under subsection 204.81(7), the corporation may appeal to the Federal Court of Appeal from the decision or from the giving of the notice.