Venture Capital Tax Planning in Canada: Managing Fund Investments, Capital Gains & Tax Liabilities
Venture capital tax planning Canada requires clear strategies to help venture capital firms and funds meet tax compliance efficiently, and Gondaliya CPA specializes in guiding clients through complex regulations including the Small Business Venture Capital Tax Credit. With expertise in tax structuring, reporting, and incentive programs, Gondaliya CPA supports optimized tax outcomes for venture capital fund tax Canada and investment tax matters.
Quick Summary
Four points that decide most venture capital tax outcomes:
- The credit is provincial and it is BC’s. 30%, refundable for individuals to $300,000, non-refundable for corporations.
- Canada has no long-term holding rate. Capital gains are included at 50% regardless of how long you held.
- T5013 is not always due 31 March. With corporate partners it is five months after the period end, or earlier.
- The at-risk rules in 96(2.1) limit what a limited partner can actually deduct.
Reading time: 35 minutes.
Table of Contents
The Numbers That Matter
This article covers Canadian venture capital funds, their managers and their investors, with Ontario and Toronto context, and reflects rules current to 27 September 2026. Securities law, fund offering documents and portfolio company valuations are outside its scope. Provincial credits differ materially, so confirm the program in the province where the investor and the business are resident. This is educational information only and not tax or legal advice.
Introduction to Venture Capital Tax Planning in Canada
Introduction and Key Considerations
Overview
Venture Capital Tax Planning: Overview and Importance
Most of the value in venture capital tax planning is decided before the first cheque is written: the structure, the allocation terms and the characterisation of exits. Very little of it can be fixed afterwards.
Role of Venture Capital Firms and Funds in Canadian Economy
Funds provide equity to companies that cannot raise debt, and the tax system responds with provincial investor credits, the lifetime capital gains exemption at the founder level, and allowable business investment losses when things fail. Those three carry more weight for early-stage investing than any structuring technique.
Key Tax Considerations for Venture Capital Investments
Risk Warning: Canada has no long-term capital gains rate. The claim that distributions “get taxed at lower rates if held long-term” describes the United States, not Canada.
A capital gain is included in income at 50% whether the shares were held for six months or sixteen years. The 2024 proposal to raise the inclusion rate to two thirds was cancelled in March 2025 and never took effect. Holding period matters in Canada only as evidence of intention, which goes to whether the profit is a capital gain at all rather than business income taxed in full.
- Capital against income: the single largest variable, worth 50% of the gain.
- Deductions: management fees at the fund, and carrying charges under 20(1)(c) where borrowing is involved.
- Partnership structures: allocation under section 96, with the at-risk rules limiting limited partners.
- Foreign holdings: T1134 for foreign affiliates, T1135 where specified foreign property exceeds $100,000, and FAPI where a controlled foreign affiliate earns passive income.
Gondaliya CPA’s Approach to Venture Capital Tax Planning
We work on flat annual fees stated before the engagement begins, covering the fund, the manager and the compliance that connects them.
Understanding the Small Business Venture Capital Tax Credit
The Small Business Venture Capital Tax Credit
Credits
Risk Warning: this is a British Columbia program, and Ontario has no equivalent. The Small Business Venture Capital Tax Credit is administered under BC’s Small Business Venture Capital Act for investments in a registered venture capital corporation or eligible business corporation.
It is 30%, and for individuals it is refundable, not non-refundable as often stated, to an annual maximum of $300,000 for investments made on or after 4 March 2025, up from $120,000. Corporate investors get 30% non-refundable with no annual cap, claimable only in the year of investment. Both can carry unused amounts forward four years. Ontario’s former early-stage investor and community small business investment fund credits no longer exist, so an Ontario investor gets nothing from this program.
Purpose and Benefits of the Small Business Venture Capital Tax Credit
| Feature | Individual investor | Corporate investor |
|---|---|---|
| Rate | 30% | 30% |
| Refundable | Yes, fully | No |
| Annual maximum | $300,000 from 4 March 2025 | No limit |
| Carryforward | Four years | Four years |
| First 60 days election | Yes, may apply to the prior year | No |
| Claimed on | Form BC479 with the T1 | Provincial schedule with the T2 |
Other provinces run their own versions, including New Brunswick, Nova Scotia and Prince Edward Island small business investor credits. Each has its own rate, cap and registration process, and none of them is federal.
Eligibility Criteria for Investors and Venture Capital Funds
- The investor must be resident in the province operating the program.
- The company must hold a pre-approved equity authorisation before raising the capital; an investment made outside an authorisation earns nothing.
- The credit budget is capped provincially, so authorisations are finite each year.
- Shares must be newly issued equity, not a purchase from an existing holder.
Qualifying Business Activities Under the Tax Credit Program
BC’s prescribed activities include manufacturing and processing, destination tourism, research and development of proprietary technology, development of clean technology, interactive digital media, and prescribed advanced commercialisation. The company must also meet size and BC-presence tests.
Restrictions and Prohibited Business Activities
- Real estate development and property rental.
- Financial services, including lending and insurance.
- Retail and most professional practices.
- Investments made from a TFSA, which do not qualify, unlike an RRSP or RRIF.
Conditions for Claiming the Tax Credit
- A tax credit certificate, SBVC 10 in BC, issued by the program administrator.
- The claim filed with the return for the year of the certificate, or within the first 60 days of the following year for individuals electing back.
- Subscription agreements, share certificates and proof of payment retained.
- Shares generally held for a minimum period; early redemption can trigger recovery of the credit.
Note two citations worth correcting: a small business corporation is defined in subsection 248(1), not 125(7), which defines a CCPC and the business limit. And T2038(IND) is the federal investment tax credit form for individuals, unrelated to provincial venture capital credits.
Tax Reporting Obligations for Venture Capital Firms
Reporting, Structures and Compliance
Reporting
Risk Warning: the T5013 deadline is not simply 31 March, and the penalty is not $12,500. A partnership whose members are all individuals files by 31 March. One whose members are all corporations files five months after the end of the fiscal period. A partnership with both, which describes most venture funds, files on the earlier of those two dates.
The late filing penalty under subsection 162(7.1) is $25 a day, minimum $100, to a maximum of $2,500. Separately, T5013 slips must be filed electronically where more than five are issued, with a penalty under 162(7.02) for filing on paper.
| Obligation | Applies to | Deadline |
|---|---|---|
| T2 corporate return | Corporate funds and managers | Six months after year-end; balance at two or three months |
| T5013 partnership return | Partnerships meeting the thresholds | 31 March, five months, or the earlier of the two |
| Part XIII withholding | Payments to non-residents | 15th of the month following payment, NR4 by 31 March |
| Section 116 certificate | Non-resident disposing of taxable Canadian property | Notice before, or within 10 days after, the disposition |
| T1134 | Foreign affiliates | 10 months after the fiscal period |
| T1135 | Specified foreign property over $100,000 | With the return |
A T5013 is required where the partnership has combined revenues and expenses over $2 million or more than $5 million in assets, or where a partner is itself a corporation or partnership. Most venture funds meet the last test from day one.
Fund Structure and Tax Implications for Venture Capital Funds
Key Stat: the at-risk rules are what actually limit a limited partner’s deductions. Subsection 96(2.1) restricts a limited partner’s share of losses to their at-risk amount, with the excess becoming a limited partnership loss carried forward indefinitely against future income from that partnership.
This is the point most fund tax summaries omit. Income allocation is transparent under section 96, but losses are not, and an investor modelling early-year write-offs against other income is usually modelling something they cannot claim. Allocation itself is under 96(1); section 97(1) governs contributing property to a partnership, which is a different question.
- Limited partnership: transparent for income, restricted for losses, with each partner reporting their share.
- Corporation: taxed at the entity level, with investment income at roughly 50.17% in Ontario, partly refundable through the RDTOH mechanism on dividend payment.
- Trust: possible mutual fund trust treatment where the conditions in 132(6) are met, otherwise complex distribution rules.
A fund allocated $1 million of losses across its limited partners in an early year, and several investors claimed their share against employment income.
Their at-risk amounts were lower than the allocations, because capital had been called in tranches and part of the commitment was still undrawn. The excess became limited partnership losses, available only against future income from that fund. Nothing was lost permanently, but the year of relief investors had been told to expect moved out by several years. Figures changed for privacy.
Compliance with Qualifying Venture Capital Fund (QVCF) Regulations
Provincially registered funds must hold qualifying investments within prescribed windows and keep certification current. Redeeming or disposing of qualifying shares too early can trigger recovery of credits already claimed, with interest, and the recovery falls on the fund or the investor depending on the program.
Carryforward and Carryback Rules for Tax Credits
Risk Warning: SR&ED belongs to the portfolio companies, not the fund, and the sections cited are wrong. Investment tax credits including SR&ED sit in subsections 127(5) to 127(9), carried back three years and forward twenty. Sections 66 to 68 concern resource expenses and have nothing to do with this.
A venture fund holding shares does not inherit a portfolio company’s SR&ED credits. What the fund and its partners do carry are non-capital losses, back three and forward twenty, net capital losses, back three and forward indefinitely against capital gains, and provincial credit carryforwards such as BC’s four years.
Common Tax Filing Challenges and Solutions
- Expense allocation between fund and manager that does not match the limited partnership agreement.
- Adjusted cost base tracking across follow-on rounds, converted notes and partial exits.
- Late T5013 filings in multi-layer structures where the earlier deadline was missed.
- Part XIII withholding on distributions to non-resident partners, and section 116 on their dispositions.
Strategic Tax Planning for Venture Capital Investments
Strategic Planning and Timing
Strategy
Optimizing Tax Outcomes through Proper Investment Structuring
| Decision | Rule | Authority |
|---|---|---|
| Expense allocation | Deducted by the entity that incurred the cost, per the agreement | ITA 9 and 18(1)(a) |
| Interest on borrowed money | Deductible where borrowed to earn income | ITA 20(1)(c) |
| Management fees | Business income to the manager; taxable supply for GST/HST | ETA 123(1)(q.1) |
| Entity selection | Partnership transparency against corporate rates | ITA 96, 123 |
| Acquisition costs | Added to the adjusted cost base, not deducted | ITA 54 |
A fund incurred $50,000 of due diligence costs, part on a deal that closed and part on one that did not. All of it had been expensed.
The portion on the closed deal is capital and joins the adjusted cost base of the shares acquired, reducing the eventual gain rather than the current year’s income. The abortive portion is also capital in character and generally cannot simply be written off; where it relates to an intended acquisition it may fall into Class 14.1 at 5%. Treating either as a current expense is the error CRA looks for. Figures changed for privacy.
A Toronto fund structured as a limited partnership reported $500,000 of management fees for a 31 December period and diarised its T5013 for the following 31 March.
Two of its partners were corporations, so the deadline was the earlier of 31 March and five months after the period end, which was 31 May. The March date happened to be correct that year, but the calendar entry was right by accident. On a fund with a June year-end the same assumption would have put the filing two months late. Figures changed for privacy.
Managing Risk and Ensuring Compliance with Prohibited Uses of Funds
- Expenses must be reasonable under section 67 and incurred to earn income under 18(1)(a).
- Personal costs are denied by paragraph 18(1)(h).
- Fee offsets must match the limited partnership agreement exactly, or the same cost is deducted twice.
- Records separating fund-level from manager-level costs should exist before the year-end, not after.
Timing Considerations for Raising Capital and Claiming Credits
Risk Warning: a section 85 rollover has a filing deadline, not a two-year completion window. The election on Form T2057 is due on or before the earliest date on which any party must file for the year of transfer. It can be late-filed for up to three years with a penalty, and beyond that only with ministerial discretion.
There is no rule causing a “deemed disposition unless done properly within two years.” Separately, a section 85.1 share-for-share exchange applies automatically where the conditions are met, with no election to file; a taxpayer who wants the gain recognised must elect out by reporting it.
- Capital gains reserve: available under subparagraph 40(1)(a)(iii) where proceeds are payable after year-end, over a maximum of five years with at least 20% recognised annually. The source’s citation to section 56(4) is unrelated; that provision deals with transfers of rights to income.
- Earnouts: the cost-recovery method may apply where the conditions in the CRA’s published position are met, otherwise the amount is part of proceeds when determinable.
- Escrowed proceeds: generally included when the taxpayer’s right to them is absolute, not when released.
- Provincial credits: tied to the authorisation window and the certificate year, not to your fiscal year-end.
Impact of Tax Legislation on Venture Capital Investment Strategies
Two legislative claims in circulation are worth checking before they reach a memo. There is no 2026 amendment to section 85 or 85.1 changing how deferred gains work on share exchanges, and there is no new certificate requiring non-resident investors to prove withholding was done on time. What is real is the electronic filing threshold for information returns, which fell to more than five slips, and the continuing reporting obligations on foreign holdings.
Advice on Maximizing Benefits While Minimizing Tax Liabilities
- Track adjusted cost base per position, per round, as it happens.
- Use the 39(4) election where appropriate to lock capital treatment on Canadian securities, noting it is unavailable to traders and dealers and is irrevocable.
- Consider whether a failed investment qualifies as an allowable business investment loss under 39(1)(c), deductible against ordinary income rather than only capital gains.
- Separate service fees from reimbursed expenses so the GST/HST follows the right amount.
- Reconcile allocations to the agreement before slips are issued, not after.
Related Programs and Legislative Framework
Programs and Legislative Framework
Framework
Overview of the Venture and Growth Capital Catalyst Initiative
The federal Venture and Growth Capital Catalyst Initiative, delivered through BDC Capital, commits government money alongside private capital into Canadian funds. It is an investment programme, not a tax measure: the government takes an interest in the fund on commercial terms rather than providing a grant.
That distinction matters for the books. Government money invested as capital is not income; government assistance, where it arises, reduces the cost of what it funds under 13(7.1) or is included under 12(1)(x). Keeping the two apart in the fund’s records is what makes the treatment defensible later.
Additional Supports for Venture Capital Investors and Fund Managers
Risk Warning: there is no GST/HST rebate on fund management services. Management fees charged to a fund are taxable supplies, because paragraph (q.1) excludes asset management services from the definition of financial service.
The fund itself generally makes exempt supplies, so it usually cannot recover the tax it pays on those fees. Where a fund qualifies as a selected listed financial institution, a special attribution method applies instead, which adjusts the provincial component rather than rebating it. Budgeting for a rebate that does not exist overstates the fund’s net return.
- Provincial investor credits, which are the real subsidy and are province-specific.
- The lifetime capital gains exemption at the founder level, which affects what founders will accept in a deal.
- SR&ED at the portfolio company level, which changes a company’s cash needs between rounds.
Key Legislative References and Regulatory Authorities
| Source | What it governs |
|---|---|
| ITA section 96 | Partnership income computation and allocation |
| ITA 96(2.1) | At-risk rules limiting limited partner losses |
| ITA 39(1)(c) and 39(4) | Business investment losses; the Canadian securities election |
| ITA 85 and 85.1 | Rollovers and share-for-share exchanges |
| ITA 212 and 116 | Withholding on payments to, and dispositions by, non-residents |
| ETA 123(1)(q.1) | Asset management services excluded from financial services |
| Provincial statutes | Venture capital credits, such as BC’s Small Business Venture Capital Act |
CRA administers the federal rules; provincial ministries administer the credits and issue the certificates; securities commissions regulate the fundraising itself and have no role in the tax treatment.
Updates on Recent Changes Affecting Venture Capital Taxation
- The capital gains inclusion rate remains 50%; the increase to two thirds was cancelled in March 2025.
- Information returns with more than five slips must be filed electronically.
- The Voluntary Disclosures Program was revised effective 1 October 2025.
- BC raised its individual credit maximum from $120,000 to $300,000 effective 4 March 2025.
Resources for Further Information and Government Contacts
- CRA business enquiries: 1-800-959-5525.
- Guide T4068, the guide for the partnership information return, which is what that guide actually covers.
- BC Investment Capital Branch for equity authorisations and certificates.
- BDC Capital for the Venture and Growth Capital Catalyst Initiative.
Contact and Support from Gondaliya CPA
Working With Gondaliya CPA
Support
How Gondaliya CPA Assists with Venture Capital Tax Planning
- Characterising exits as capital or income, and documenting the basis for it.
- Management fees, fee offsets and the GST/HST that follows them.
- Allocations, at-risk amounts and T5013 slips that reconcile to the agreement.
- Non-resident withholding and section 116 clearance on dispositions.
- Provincial credit claims and the clawback conditions attached to them.
Steps to Engage Gondaliya CPA for Tax Compliance Services
- We read the limited partnership agreement and the management agreement first.
- We collect deal files and the cap table to establish adjusted cost base by position.
- We review prior filings for missed withholding and foreign reporting.
- We prepare the T2 or T5013 and the GST/HST returns together.
- We calendar the deadlines that apply to your specific partner mix.
Accessing Personalized Advice and Customized Tax Solutions
Most questions in this sector turn on facts rather than rules: what the agreement says about fee offsets, whether the fund traded or held, whether a founder’s shares qualified. We work from the documents rather than from generic structures, and we say plainly where the answer depends on something that has not been decided yet.
FAQs on Venture Capital Tax Planning
Frequently Asked Questions
FAQ
What is the typical expense deduction period for venture capital funds in Canada?+
Operating costs are deducted in the year incurred, under sections 9 and 18(1)(a). Costs of acquiring an investment are capital and join the adjusted cost base instead. Formation costs generally fall into Class 14.1 at 5% rather than being expensed.
How does the share-for-share exchange election benefit venture capital firms?+
Section 85.1 defers the gain when shares of a Canadian corporation are exchanged for shares of a Canadian purchaser, and it applies automatically where the conditions are met. There is no election form; a taxpayer wanting to recognise the gain elects out by reporting it. Section 85 is the separate rollover requiring Form T2057.
When must withholding tax on distributions to non-residents be remitted?+
By the 15th day of the month following the month the amount was paid or credited, under Part XIII. The statutory rate is 25%, commonly reduced by treaty, and NR4 slips are due by 31 March. Withholding at the moment of distribution but remitting late still attracts interest and penalties.
What is the deadline for filing partnership information returns (T5013)?+
31 March where all members are individuals, five months after the fiscal period end where all are corporations, and the earlier of the two where the partnership has both. Most venture funds fall in the third category. The late penalty is $25 a day, minimum $100, maximum $2,500.
How long should venture capital firms retain records related to investments and expenses?+
Six years from the end of the taxation year under subsection 230(4). Adjusted cost base records should be kept for as long as the position is held plus six years, because the gain cannot be computed without them.
What is the carryforward period for unused tax credits in venture capital funds?+
Federal investment tax credits under 127(9) carry back three years and forward twenty. BC’s venture capital credit carries forward four years. Non-capital losses carry back three and forward twenty; net capital losses carry back three and forward indefinitely against capital gains.
How often must GST/HST filings be submitted for venture capital management services?+
By assigned frequency: annual at $1.5 million of taxable supplies or less, quarterly to $6 million, monthly above. Management fees are taxable under paragraph (q.1), and the manager charges tax at the rate for the recipient’s province.
What is the deadline for submitting a non-resident disposition certificate?+
Notice under section 116 is given before the disposition or within 10 days after it. Missing that exposes the purchaser to withholding of 25% of the gross proceeds, which is why the certificate is usually a closing condition rather than an afterthought.
How should broken deal costs be treated for tax purposes?+
Generally as capital, not as a current expense. Costs on a completed acquisition join the adjusted cost base of the shares; costs on an abortive one may fall into Class 14.1 at 5%. Deducting them outright is a common and easily spotted error.
Are formation costs of a venture capital fund deductible immediately?+
No. Since the eligible capital property regime was replaced in 2017, incorporation and organisation costs generally go to Class 14.1 and are deducted at 5% declining balance, subject to the small first-tranche rule for incorporation expenses.
What are fee offsets in relation to venture capital management fees?+
Amounts the manager receives from portfolio companies, such as monitoring or director fees, that reduce the management fee payable by the fund under the agreement. If the offset is not applied as written, the same cost can be deducted twice, which is exactly what a review targets.
How does the exit characterization rule affect taxation upon portfolio company sales?+
Characterisation decides whether the profit is a capital gain, included at 50%, or business income, taxed in full. There is no single rule; CRA weighs intention, frequency, holding period, financing and the taxpayer’s expertise. For a fund, the difference on a large exit is the largest number on the return.
What factors influence holding period considerations in venture capital investments?+
Holding period is evidence of intention, not a rate trigger. Canada has no preferential rate for long-held assets. A long hold supports capital treatment; rapid turnover points toward business income.
How does frequency of sales impact a venture capital fund’s tax position?+
Frequent trading is one of the strongest indicators of a trading business, which would make gains fully taxable. A fund making a handful of exits from a held portfolio looks very different from one turning positions over within months.
Why is investor intention important in classifying investment income?+
Because the capital or income question is decided on the taxpayer’s intention at acquisition, judged by conduct rather than assertion. Board minutes, the offering memorandum and the hold history all speak to it, which is why they matter at the exit even though they were written at the start.
When does method of exit impact tax outcomes in venture investments?+
A cash sale triggers the gain immediately. A share exchange may defer it under 85.1. An earnout may allow the cost-recovery method, and proceeds payable after year-end may support a reserve under 40(1)(a)(iii) over up to five years.
Can a failed investment be deducted against ordinary income?+
Possibly. A loss on shares of a small business corporation can be a business investment loss under 39(1)(c), half of which is an allowable business investment loss deductible against any income, not only capital gains. The company must meet the 248(1) definition at the relevant time.
Quick Answers: Key Numbers & Concepts at a Glance
At a Glance
| Item | 2026 position |
|---|---|
| Capital gains inclusion rate | 50%, any holding period |
| BC venture capital credit | 30%; refundable to $300,000 for individuals |
| Ontario equivalent | None |
| T5013 deadline | 31 March, five months, or the earlier of both |
| T5013 late penalty | $25 a day, $100 to $2,500 |
| Electronic filing | Required above five slips |
| Part XIII withholding | 25%, treaty-reduced, remitted by the 15th |
| Section 116 notice | Before, or within 10 days after, the disposition |
| Capital gains reserve | Up to five years, 40(1)(a)(iii) |
| Section 85 election | T2057, late-filed up to three years with penalty |
| Class 14.1 | 5% for formation and abortive acquisition costs |
| Record retention | Six years from the end of the taxation year |
Who This Is For / Not For
Fit Check
- For: Canadian venture capital funds, their managers and investors dealing with allocations, exits, provincial credits and non-resident partners.
- Not For: Securities law and offering document questions, portfolio company valuations, and founder-level exemption planning, which is its own exercise.
People Also Ask
Quick Answers
Does Canada tax long-held venture investments at a lower rate?+
No. The inclusion rate is 50% regardless of holding period. Time held matters only as evidence that the gain is capital rather than business income.
Which province offers the Small Business Venture Capital Tax Credit?+
British Columbia, at 30%, refundable for individuals to $300,000 a year and non-refundable with no cap for corporations. Other provinces run different programs; Ontario currently has none.
Can limited partners deduct fund losses against other income?+
Only up to their at-risk amount under 96(2.1). The excess becomes a limited partnership loss carried forward against future income from that same partnership.
Do we charge GST/HST on management fees to our own fund?+
Yes. Asset management services are excluded from financial services by paragraph (q.1), so the fee is taxable, and the fund usually cannot recover the tax because it makes exempt supplies.
What happens if a non-resident partner sells their interest?+
Where the interest is taxable Canadian property, section 116 applies: notice before or within 10 days after, or the purchaser withholds 25% of gross proceeds. Clearance is normally a closing condition.
Essential Tax Planning Points for Venture Capital Firms by Gondaliya CPA
Checklist
- Share-for-share exchange: section 85.1 applies automatically; elect out only deliberately.
- Earnout treatment: cost-recovery where the conditions are met, otherwise proceeds when determinable.
- Escrow release: included when the right to the amount is absolute, not on release.
- Convertible note conversion: check whether conversion is a disposition before it happens.
- Failed investments: test for a business investment loss under 39(1)(c) before writing anything off.
- Wind-up distributions: characterised at the partner level on the fund’s final allocation.
- Non-resident distributions: Part XIII withholding, remitted by the 15th, NR4 by 31 March.
- Filing challenges: the earlier T5013 deadline, allocation mismatches and missing cost base records.
- CRA review triggers: large deductions without agreements, late slips, inconsistent allocations.
- Catching up: oldest year first, through a voluntary disclosure while still unprompted.
- Top mistakes: expensing capital costs, double-deducting through fee offsets, assuming loss transparency.
- Before planning starts: the agreements, cap table, prior returns and deal files.
- Decisions that matter most: structure, allocation terms, exit characterisation and credit timing.
- Pricing: a flat annual fee, including HST, stated before the work begins.
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Three things drive venture capital tax outcomes in Canada, and two of them are commonly described wrongly. The first is characterisation: a gain included at 50% or business income taxed in full, decided on intention as evidenced by conduct, with holding period as proof rather than as a rate trigger. Canada has no long-term capital gains rate, and the 2024 proposal to raise the inclusion rate to two thirds was cancelled in March 2025, so 50% is simply the answer. The second is the partnership machinery. Income allocates transparently under section 96, but losses do not: the at-risk rules in 96(2.1) cap what a limited partner can deduct, and the excess becomes a limited partnership loss usable only against future income from that same partnership. Any model showing investors writing early-year fund losses off against salary is usually wrong. The third is the credit, which is provincial rather than federal. British Columbia’s Small Business Venture Capital Tax Credit pays 30%, refundable for individuals to $300,000 a year since March 2025, non-refundable and uncapped for corporations, and it requires a pre-approved equity authorisation before the money goes in. An Ontario investor gets none of it, because Ontario no longer runs an equivalent program.
What is current as at 27 September 2026: the capital gains inclusion rate remains 50%, the proposed increase to two thirds having been cancelled in March 2025. British Columbia raised the individual maximum under its Small Business Venture Capital Tax Credit from $120,000 to $300,000 effective 4 March 2025, with the program’s annual budget increased to $53.5 million for 2025 to 2027; the credit remains 30%, refundable for individuals, non-refundable and uncapped for corporations, with a four-year carryforward. Information returns including T5013 slips must be filed electronically where more than five are issued. The Voluntary Disclosures Program was revised effective 1 October 2025. Unchanged for 2026: partnership allocation under section 96 and the at-risk rules in 96(2.1); the T5013 deadlines and the $25 per day penalty under 162(7.1); section 85 rollovers on Form T2057 with the three-year late-filing window, and automatic 85.1 treatment on qualifying share exchanges; the capital gains reserve in 40(1)(a)(iii) over five years; business investment losses under 39(1)(c) and the small business corporation definition in 248(1); Part XIII withholding and section 116 notice within 10 days; asset management services taxable under ETA paragraph (q.1); and six-year retention under 230(4).
Venture Capital Tax: How Gondaliya CPA Supports You
Raising a fund, closing an exit, or facing your first T5013 with mixed partners?
For a flat annual fee stated before the work starts, we read the partnership and management agreements first so allocations and fee offsets are applied as written rather than as assumed, establish adjusted cost base by position across follow-on rounds and conversions, test each exit for capital against income treatment and document the basis, apply reserves and rollovers where they genuinely fit, handle Part XIII withholding and section 116 clearance for non-resident partners, calendar the T5013 deadline that actually applies to your partner mix, and file the T2, the partnership return and the GST/HST returns together.
Next Steps
Book a free consultation with Gondaliya CPA. Bring the limited partnership agreement, the cap table with your cost per position, and your last filed returns. Those three settle the allocation question, the cost base and the filing calendar in one sitting. You’ll get a flat fee before any work begins. We serve Toronto, Mississauga, Vaughan, Ottawa and the rest of Ontario, and work remotely across Canada.
Published: · Last updated:
Editorial policy: Rates, provisions, deadlines and provincial program terms are verified against the Income Tax Act, the Excise Tax Act, their Regulations, CRA publications and provincial program materials before publication, and updated when the rules change.
Disclaimer: This article is educational information only and is not tax, legal, or financial advice. Outcomes depend on your fund documents, partner composition and the province in which investors and portfolio companies are resident. Please speak with a CPA before acting.
Sharad Gondaliya is a CPA Canada & CPA USA with 15 Years+ experience of Accounting, Tax, Payroll of Corporate Small Businesses as Tax Accountant. He is fully certified CPA Ontario and CPA USA and is well known among corporate small businesses for tax planning, efficient tax solutions, and affordable CPA services. Sharad is the Principal (Director) of Gondaliya CPA – Affordable CPA Firm in Canada. Licenses: CPA Ontario: 61040184 | CPA USA (MT): PAC-CPAP-LIC-033176 | CPA USA (WA): 57629 | CPA Firm License: 61330051 View Full Author Bio