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A Guide to Ontario's Community Small Business Investment Fund Program

June 2001

Table of Contents

Note:
This guide provides a general description of Ontario's Community Small Business Investment Fund (CSBIF) program. It is not intended as a substitute for the Community Small Business Investment Funds Act and Regulations. Copies of the Community Small Business Investment Funds Act, may be obtained from the Publications Ontario bookstore by calling (416 326-5300), or from their website: www.publications.serviceontario.ca. Click on Legislation Online/Ontario's Acts and Regulations.

Community Small Business Investment Fund

Program overview

The purpose of the Community Small Business Investment Fund (CSBIF) program is to provide Ontario small businesses (total assets of $1 million or less at the time of a CSBIF's initial investment) with greater access to investment capital. The program does this by encouraging the formation of community sponsored venture capital pools (each CSBIF is restricted to a maximum size of $10 million), and by providing eligible investors with incentives for purchasing Class A shares of registered CSBIFs. (Class A shares are defined to be a share of a class of shares that have voting rights, entitlement to dividends, and upon the dissolution of the corporation, entitlement to the remaining assets of the corporation).

Once registered and capitalized, a CSBIF is required to make investments in eligible businesses located within the community of its sponsor. In this way, CSBIF corporations provide small businesses in Ontario with an alternative source of investment capital necessary to promote growth and create jobs.

This guide explains the requirements for establishing a CSBIF, the benefits available to purchasers of CSBIF shares and the rules governing the investment of CSBIF capital into eligible businesses that operate primarily in Ontario communities.

Benefits of the CSBIF program

The objective of the program is to strengthen the Ontario small business sector by creating new sources of investment capital that will assist small businesses to expand, develop new products and create employment within the province. Community sponsors benefit from the increased economic activity generated when a CSBIF invests in eligible businesses operating primarily within the community of the sponsor.

Participating eligible investors in Class A shares of a CSBIF benefit from the incentives they receive from the Ontario government following their purchase of CSBIF shares. They may benefit from potential returns realized on their CSBIF investments.

How the program works

A Community Small Business Investment Fund is a Canadian corporation that is registered under Part III.1 of the Community Small Business Investment Funds Act. An application for registration must be submitted by an eligible community sponsor. Eligible community sponsors are defined in the CSBIF Act. The sponsor of a CSBIF determines the 'community' in which businesses must primarily operate in order to be considered eligible investments for the CSBIF.

Illustration of How the Program Works

Illustration of how the Community Small Business Investment Funds program works

  1. A community sponsor incorporates a company and applies to the Ministry of Revenue (MoF) to register it as a CSBIF. 
  2. MoF reviews the application and related documentation. If approval is granted, MoF assigns a registration number and issues a Certificate of Registration. 
  3. The CSBIF issues equity shares to investors in return for cash consideration. 
  4. MoF issues incentives to eligible investors who purchase Class A CSBIF shares. 
  5. When the CSBIF makes eligible investments in eligible businesses, MoF provides additional incentives to the CSBIF investors.

Eligible community sponsor

The following may be a community sponsor of a CSBIF:

  • an upper-tier municipality, one or more lower-tier municipalities within an upper-tier municipality or a local municipality as defined in the Municipal Act
  • a person or organization designated by the Minister of Finance as a community sponsor for a territory without municipal organization
  • the council of a First Nation
  • an organization designated by the Minister of Finance as a community sponsor for an aboriginal community other than a First Nation
  • one or more universities or colleges of applied arts and technology in Ontario, or research institutes affiliated with an Ontario university or hospital approved as a public hospital under the Public Hospitals Act.

Registration of a CSBIF

A community sponsor must file an application with the Ministry of Revenue to register a corporation under Part III.1 of the Community Small Business Investment Funds Act. The deadline for submitting an application is December 31, 2001. CSBIF registration packages may be obtained from the Ministry of Revenue. Please see page 10 for Ministry contact information.

A corporation proposed for registration must be incorporated under the Ontario Business Corporations Act or the Canada Business Corporations Act and must be in compliance with the Act under which it is incorporated and with the Ontario Securities Act. The corporation must not have carried on any business activity prior to the time of registration, other than activity directly related to the application for registration.

At the time of application, the corporation must be able to demonstrate that it has received offers from eligible investors to invest at least $2 million in shares of the corporation as well as offers from one or more Labour Sponsored Investment Fund and/or Qualifying Financial Institutions to invest an amount greater than 25 percent of the overall proposed capitalization of the CSBIF.

The CSBIF Act contains specific requirements with respect to the nature of business activities that a registered CSBIF may engage in, the type of share capital it may issue to investors, the amount of share capital it may raise, the types of investments it can make, et cetera. Many of these restrictions must be included in the Articles of the Corporation.

Articles of the corporation

The articles of a corporation with intent to register as a CSBIF must provide for the following:

  • the business of the corporation shall be restricted to assisting the development of eligible businesses, creating, maintaining and protecting jobs by providing financial and managerial advice to eligible businesses and making eligible investments, and incorporating and controlling other corporations as the corporation may consider advisable, to provide financial, investment or managerial advice and expertise
  • the capital of the corporation shall consist of Class A shares issuable only to eligible investors, and such other shares as may be authorized by the board of directors of the corporation and the Minister of Finance
  • investment in shares of the corporation by a single investor or related group shall be restricted to a maximum of $5 million
  • the aggregate investment in shares of the corporation shall be restricted to a maximum of $10 million
  • each eligible investor must invest at least $25,000 in Class A shares of the corporation
  • the corporation shall be prohibited from paying any fee or remuneration to a shareholder of the corporation or to any person related to a shareholder, except for:
    1. banking fees and other amounts normally charged by a bank to its customers for providing services in the ordinary course of the bank's business, and
    2. reasonable salaries and wages paid to employees;
  • at least one member of the board of directors of the corporation shall be appointed
    by a community sponsor of the corporation.

Other restrictions

A registered CSBIF is restricted from paying dividends or authorizing any return of capital to an eligible investor within six years after the end of its investment period (the first anniversary of the date of registration) and until at least 70 per cent of the equity capital received by the corporation on the issue of its class A shares have been invested in eligible investments. A CSBIF cannot liquidate its assets or wind up its operations within ten years of its registration date without the prior consent of the Minister of Finance.

Registration approval

Once the Ministry of Revenue is satisfied that all of the requirements for registration have been met, the corporation is issued a Certificate of Registration and the corporation's name is entered into the register of Community Small Business Investment Funds. Following confirmation that the registration has been approved, the corporation may proceed to issue shares to eligible investors.

'Eligible investors'

The CSBIF Act stipulates that Class A shares of a CSBIF may be issued only to eligible investors. An eligible investor may be any of the following:

  • a registered Labour Sponsored Investment Fund (LSIF) corporation
  • a qualifying financial institution or a specified corporation or insurance corporation related to the qualifying financial institution for the purposes of section 66.1 of the Corporations Tax Act (banks, trust companies, credit unions and institutions authorized to accept deposits from the public and carry on the business of lending money on the security of real estate or investing in mortgages on real estate as well as holding companies, all of whose assets are shares of any of the above)
  • an individual, pension fund or corporation that is not an LSIF or a Qualifying Financial Institution.

Investment incentives for 'eligible investors'

The following investment incentives are available to each category of eligible investors:

I. Labour Sponsored Investment Fund (LSIF) incentives

LSIFs that purchase Class A shares of registered CSBIFs prior to January 1, 2002, will be eligible for the following investment incentives:

  • twice the amount invested in CSBIF shares (or formally set aside for investment in CSBIF shares) may be credited to the LSIF's small business investment requirements, and the amount invested may be credited toward the LSIF's overall investment requirement, or 
  • twice the amount invested in CSBIF shares (or formally set aside for investment in CSBIF shares) may be credited against any investment level taxes the LSIF would otherwise be required to pay to the Minister of Finance for failing to meet its investment requirements, for the year the investment (or set-aside) was made. 

  • Additional LSIF investment incentives

    An LSIF will receive an additional investment incentive equal to its proportionate share of the amount invested by the CSBIF in eligible businesses for the year in which the investments are made. The amount may be credited against both

    • the LSIF's small business investment requirements, and
    • the LSIF's overall investment requirements

II. Qualifying financial institution incentives

Qualifying Financial Institutions that purchase Class A shares of a CSBIF prior to January 1, 2002 will be allowed tax credits under the Corporations Tax Act, equal to 30 per cent of the amount paid for the Class A shares.

  • Additional investment incentive for qualifying financial institutions

    Qualifying financial institutions will be allowed additional tax credits equal to 30 per cent of their proportionate share of the amounts invested by the CSBIF in eligible businesses.

III. Qualifying individuals and corporations that are not LSIFs or qualifying financial institutions

This category of investor will receive a cash incentive based on the amount invested in Class A shares of a registered CSBIF prior to January 1, 2002. Incentives paid to this class of investor are based on all investments from a minimum of $25,000 to a maximum of $500,000. The amount of the incentive is equal to 7.5 per cent of the equity capital paid for Class A shares to a maximum of $37,500.

  • Additional investment incentives for qualifying individuals and corporations

    Qualifying individual or corporate investors will receive an additional incentive equal to 7.5 per cent of their proportionate share of the amounts invested by the CSBIF into eligible small businesses, up to a maximum of $37,500.

CSBIF investments in small businesses

A registered CSBIF is required to invest an amount equal to at least 35% of the equity capital raised within its investment period, within 30 months of the end of the investment period, in eligible businesses. At least 70% of the amount raised in the CSBIF's investment period must be invested within 72 months of the end of the investment period. (The investment period of a CSBIF is defined as the twelve months immediately following the date of registration.)

'Eligible investment'

An eligible investment for a CSBIF is the acquisition of an eligible form of investment, in business that is primarily engaged in eligible business activities, primarily within the community of the CSBIF sponsor. Each component of this definition is explained below:

Eligible forms of investment

A CSBIF may purchase any of the following forms of investment in an eligible small business:

  • equity shares in a corporation or an ownership interest in a partnership
  • a qualifying debt obligation
  • a guarantee provided by the CSBIF corporation in respect of a debt obligation of an eligible business, or
  • an option or right granted by an eligible business in conjunction with the issue of a share or debt obligation of the business.

'Eligible business'

An eligible business is a taxable Canadian corporation or Canadian partnership that meets the following conditions:

  • at the time of the initial investment by the CSBIF, the total gross assets of the corporation or partnership, together with the total gross assets of all related corporations and partnerships, do not exceed $1 million;
  • at the time of the investment, the sum of the following must exceed 1.5:
    1. the percentage (expressed as a decimal fraction) that the wages and salaries paid to employees employed in respect of its eligible business activities carried on within the community of the sponsor is of the total wages and salaries paid by the business, and
    2. the percentage (expressed as a decimal fraction) that the value of the gross assets that are used in its eligible business activities carried on within the community of the sponsor is of the value of its total gross assets.

'Eligible business activity'

An eligible business activity means any business that would be an active business carried on by a corporation for the purposes of Section 125 of the Income Tax Act (Canada) if carried on by a corporation, but does not include,

  1. a business, the principal purpose of which is to derive income from real estate
  2. a business, the principal purpose of which is to derive income from property, including interest, dividends, rents and royalties, and
  3. a business that is a personal services business.

'Within the community'

Within the community of the sponsor is defined as:

  1. within the geographical limits of a municipality, if the community sponsor is a municipality
  2. within the geographical limits of the territory designated by the Minister of Finance, if the community sponsor has been designated as a community sponsor for a territory without municipal organization
  3. within the geographical limits of the reserve of a First Nation, if the community sponsor is the Council of that First Nation
  4. within the geographical limits of the territory designated by the Minister of Finance for a designated aboriginal community sponsor
  5. if the sponsor is a university, college, or research institute affiliated with a university or hospital,
    1. within a facility of the community sponsor, or
    2. within a place of business in Ontario where intellectual property developed by the community sponsor, or its faculty, staff or graduates, is used in eligible business activities;
  6. if a municipality and a university, college or a research institute affiliated with a university or hospital are co-sponsors of a CSBIF,
    1. within the geographic limits of the municipality that is the co-sponsor
    2. within a facility of the institutional co-sponsor, or
    3. within a place of business in Ontario where intellectual property developed by the institutional co-sponsor or by its faculty, staff or graduates is used in the eligible business activities.

Restrictions on the use of funds invested by a CSBIF in eligible businesses

Specific restrictions apply to the use of funds invested by a CSBIF in eligible small businesses. Eligible small businesses may not use CSBIF financing for any of the following:

  • re-lending
  • investments in land except land that is incidental and ancillary to the eligible business activity
  • reinvestment or the acquisition of securities of any person
  • financing the purchase or sale of goods or services provided to the eligible business by or through a shareholder of the CSBIF corporation or a person related to a shareholder of the corporation, except for a shareholder that is a sponsor of the CSBIF and is a First Nation, a designated aboriginal community, a university, college of applied arts and technology or a research institute affiliated with a university or hospital
  • the payment of dividends to shareholders or drawings to partners of the eligible business
  • the return of capital to a shareholder or a partner of the eligible business
  • the payment of the principal amount of outstanding liabilities owing to
    shareholders of the CSBIF corporation or to persons related to such
    shareholders
  • carrying on business outside Ontario.

Other investment restrictions

A CSBIF's total investment in a particular business, must not exceed 20 per cent of the equity capital received by the CSBIF on the issuance of its class A shares.

A CSBIF corporation must not make an investment in a business if that business does not deal at arm's length with the CSBIF corporation, or with any of its directors. This restriction does not apply to a CSBIF corporation that operates within an aboriginal community.

Legislation interpretations

  • Legislation interpretations
    Tax Advisory Services Branch
    1 866 ONT-TAXS (1 866 668-8297)
    1 800 263-7776 teletypewriter (TTY)

Further information

To obtain the most current version of this publication, or additional information, visit our website at ontario.ca/revenue or contact the Ministry of Revenue at:

  • 1 866 ONT-TAXS (1 866 668-8297)
  • 1 800 263-7776 teletypewriter (TTY)

© Queen's Printer for Ontario, 2005

ISBN 0-7794-1504-3

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