In 1992, the government of Nova Scotia became aware that local businesses, in particular SMEs, were struggling to get adequate financing for their operations and expansion. Nova Scotia citizens and investors used to invest their capital elsewhere and left local businesses without access to sufficient financing. One citizens’ advisory group recommended the implementation of tax incentives to encourage investment in local businesses. As a result, the Equity Tax Credit Act was passed in 1993, but the tax credit was initially underutilised. A group of local representatives identified a range of barriers to adoption of the tax credit, "including the cumbersome documentation required of enterprises and the lack of community infrastructure to support it".. Therefore, alternative initiatives needed to be created to ensure that local business would have access to financing and capital.
At the same time, private households represented a significant target group with an unexploited potential to invest in local financial assets: "according to Statistics Canada, Nova Scotians contribute approximately CAD600 million to Registered Retirement Savings Plans (RRSPs); however, less than two per cent is reinvested in the province (Stats Can, cited by Government of Nova Scotia)”.
In 1999, the Community Economic Development Investment Fund (CEDIF) programme was launched to further encourage local residents to invest in the community and small local businesses. CEDIF is a pool of capital from local citizens that is used to invest in local (for-profit) businesses in the community. It is intended to encourage Nova Scotians to keep that money circulating in the local economy by investing in funds that invest in local companies. The funds are managed by a local group of representatives chosen by the founders of the Fund itself or by the people investing in it. "The CEDIF programme simplifies the offering process, allowing businesses and communities to raise equity capital through local investment funds rather than undertaking the onerous prospectus documentation process typically required."
This process is aimed at facilitating the engagement of local businesses with individual investors interested in financing projects that have a positive impact in the community. The main actors involved are:
- "Investors: Currently, only individual investors are eligible to receive the 35% tax credit, which can be carried forward up to seven years or be applied to tax returns up to three years in arrears.
- "Local enterprise: Investments are directed into local corporations, cooperatives or associations with the specific purpose of generating profitable revenue streams and stimulating economic growth in regions throughout Nova Scotia.
- "Community: All funds raised through CEDIFs are directed towards businesses and social enterprises established in local communities throughout the province. This focus helps stimulate local economic growth through creating jobs, generating a new tax base and providing the opportunity for local capital (human, social and economic) retention within a region.
- "Provincial government: The provincial government regulates and approves all activity related to CEDIFs."
A key rationale for establishing a tax-beneficial CEDIF structure is the obvious benefit of directing funds back into one’s own community in order to help stimulate the local economy. Providing tax credits significantly increases the attractiveness of CEDIFs to investors. Before that, most investment vehicles resulted in funds being moved to support corporations located in major urban centres in Canada or other countries. This exodus of funds did nothing to help local communities.
The public impact
CEDIFs were able to reinforce the available tax credits and increase the amount of local capital invested in Nova Scotia. It made it easier for local entrepreneurs to get access to capital and support the development of new businesses. "As of March 31, 2013 Nova Scotia has 47 CEDIFs with a combined 121 public offerings that have raised and invested over CAD56 million in local businesses from 7,466 individual Nova Scotia investors. To date, only three CEDIFs have failed and approximately 20% are paying out dividends."
Its accessible model has increased the engagement of local residents and enabled investment in communities that were previously underserved by existing institutions. "One of its core contributions is that it reduces transaction costs for investors and investees by providing simplified offerings for local businesses seeking equity and encouraging stakeholders to engage in the market."
More significantly, CEDIFs have been instrumental in shifting power to the community and transforming the approach to local projects. "The success of the CEDIFs in providing consistent returns on investment to investors has helped change attitudes towards investing locally, demonstrating that it is not only a righteous thing to do, but it is also a good investment.”
Public Confidence Good
The format of the CEDIFs made it simpler for residents and businesses to get involved in the local investment funds, while maintaining the existing financial incentive of the tax credit. As a result, more investors, businesses and communities have been utilising the programme over time. This is evidenced by the number of new and expanding funds, individuals getting involved, as well as capital invested, which is over CAD40 million. "People are increasingly recognising the benefits of investing in CEDIFs. The number of investors climbed to nearly 1,000 at the start of 2014, a 34% increase since 2005, according to the Nova Scotia’s department of Rural Development and Tourism."
Stakeholder Engagement Strong
At the time that the Equity Tax Credit Act was launched, there was an increasing awareness of the need to encourage community investment, and the necessity for a distinct model to do this. This challenge was studied for a few years before the CEDIF model was formally launched in 1999. "Throughout 1996-98, extensive public consultations made it clear that additional sources of funding should be developed from within the community. Communities should be encouraged to take charge of their own initiatives, and retain local autonomy with respect to investment decisions."
The existing tax credit system was then studied by a group with representatives from the Nova Scotia Securities Commission, the Finance Department and the Department of Economic Development and Tourism, who identified several barriers to participation, including obstacles in the application process and the lack of community infrastructure to support it. "In 1999, following the activities of the working group, the CEDIF programme was established through an amendment to the 1993 Act to address the barriers identified."
Political Commitment Strong
The CEDIF programme, led by the Ministry of Economic and Rural Development and Tourism, is considered to date a successful tool to channel local capital into community projects, and as such has received significant support from the Canadian government. Greg Kerr, Member of Parliament for West Nova, declared after announcing investment in a CEDIF: "The Government of Canada is pleased to support the development of self-sustaining, economically viable communities in southwestern Nova Scotia... This investment reflects the goals of our Government’s Economic Action Plan by continuing to provide timely and targeted supports to communities across Canada.”
There has also been a push to implement similar initiatives in other states, such as British Columbia. "Columbia Shuswap Regional District South Shuswap director Paul Demenok would like Victoria to initiate a [CEDIF] that would offer British Columbians a tax credit for investing in locally owned and operated corporations, co-operatives and other community economic development initiatives – he got unanimous support from the other directors at the regional district’s board meeting."
CEDIF funds have also been used recently by the Ministry as an economic tool to finance local energy projects, which are a key government priority: "CEDIFs are being used to finance small-scale renewable energy projects such as community feed-in tariff (COMFIT) projects".
Clear Objectives Good
CEDIFs were launched to address the lack of incentives and investment in local projects in Nova Scotia by raising the money from the same communities who are meant to benefit. "CEDIFs were designed to stimulate economic growth, provide new employment opportunities and rejuvenate existing economic sectors in the province of Nova Scotia.". The main objectives were to enhance access to financing for local SMEs. This was done by engaging citizens in investing in their own communities and channelling capital investments into local businesses in Nova Scotia.
There is no evidence that previous experience was taken into account in the design of the CEDIF programme. On the other hand, there was relevant experience from the implementation of the Tax Credits in 1993 that allowed for evaluation and improvement to get to the current model, which has been credited with very positive results.
Only a decade after implementation did the government undertake an internal evaluation. "An early analysis of the CEDIF model was done in Nova Scotia. It suggested that the return to the Province was positive after two years even with providing the tax credit up front. Ten years after launching its programme (1999), Nova Scotia has [securely] established the CEDIF model and proven its success."
The programme had its foundation in the Equity Tax Credit Act, which already provided much of the legal framework to make it possible: "CEDIFs bring together securities and tax regulations through the Equity Tax Credit Act". Government was able to build on this tax credit programme to establish the CEDIFs, which enable the formation of investment pools focused on local SMEs. The CEDIF process involves the following steps:
- "Individual investors are issued the tax credit when they place their money into the CEDIF
- "No single investor can hold more than 20% of ownership
- "A CEDIF must first obtain an equity tax credit certificate from the Department of Finance as well as a 'letter of non-objection' from the Securities Commission before having 90 days to sell investment shares."
Detailed guidelines and regulations for the establishment, limitations, funding limit and other relevant conditions for the implementation of the CEDIFs are outlined in Policy 45-601 from the Nova Scotia Securities Commission.
The policy enforcement and documentation for the creation of CEDIFs are managed by the Nova Scotia Securities Commission (NSSC). This policy specifies the regulatory requirements for fund management and compliance. In turn, funds are controlled by a local group of officers and directors, who can be chosen by the founders of the CEDIF or by the CEDIF’s investors at an annual meeting. "To establish a CEDIF offering, the applicants must prepare and file the Form 1 Simplified Offering Document and receive a letter of non-objection from the Director of the NSSC as well as an Equity Tax Credit (ETC) certificate from the Minister of Finance. Once these are in place, the CEDIF can raise capital through a restricted public offering in Nova Scotia and advertise its shares to the public in the defined community. However, all such advertising must be approved by the Director of the NSSC."
The performance and adoption of CEDIFs have been monitored from the start to keep track of the evolution of funds, investors, and results metrics. "Since its inception in 1999, total funds raised have grown at a 44% average annual growth rate. In 1999, CEDIFs across the province raised CAD1.1 million (USD 1 million) from 261 investors, compared with CAD7.5 million (USD 7.4 million) from 914 investors in 2012. The programme continues to gain traction among individuals throughout Nova Scotia as it becomes a demonstrated and viable investment option." Over 5,000 community investors have provided about CAD40 million in capital in over 90 successful offerings.
There is an ongoing partnership between the government organisations involved, allowing the framework to operate smoothly. "The CEDIF programme is housed at the Ministry of Economic and Rural Development and Tourism but requires close collaboration between the Ministry of Finance and the NSSC. The programme is built with three distinct policy levers to encourage community investment. First, the NSSC provides CEDIFs with a simplified filing document, alleviating the otherwise cumbersome and expensive investor prospectus process. Second, the Ministry of Finance provides investors with the income tax credit once their investments have been registered with the NSSC. Finally, investors are able to register their investments through self-directed Registered Retirement Savings Plans (RRSPs), which qualify investors for further federal income tax deductions."