10 Community Economic Development Investment Funds, Canada
10 Community Economic Development Investment Funds, Canada
Community Economic Development Investment Funds, Canada
Grow and Direct Private Capital
Geography: Nova Scotia, Canada
Toolkit step: Grow and Direct Private Capital
In Brief: Initiated in 1999, Community Economic Development Investment Funds (CEDIFs) were designed to stimulate economic growth, provide new employment opportunities and rejuvenate existing economic sectors in the province of Nova Scotia. To achieve this impact, the CEDIF model provided individual investors a 30% tax credit on investments into local communities. Since the programme’s inception, the tax credit has been raised to 35% and has directed over CAD 49 million (US$ 48 million) to support locally-owned and operated businesses and social enterprises.
The experience in Nova Scotia provides several insights for policy-makers looking to CEDIFs as an example of how to grow and direct private capital, including:
- Reduce the transaction costs of investment opportunities
- Reinforce current investment activities by incorporating other innovations
- Identify opportunities to engage new investors and generate larger supplies of capital
Policy Goals and Development
In 1992, a Nova Scotia citizens’ advisory group identified the need for new financing tools to support local community economic development, recommending the provision of tax incentives to spur new investment in local business. Resulting legislation, the Equity Tax Credit Act passed in 1993, permits individuals to qualify for a tax credit when investing in businesses located in and hiring from Nova Scotia, thus allowing fellow citizens to support entrepreneurs in their own communities.
Despite these initial efforts, the tax credit was underutilized. Aware of this problem, a working group with representatives from the Nova Scotia Securities Commission, Finance Department and Department of Economic Development and Tourism identified several barriers to participation, including the cumbersome documentation required of enterprises and the lack of community infrastructure to support the tax credit. In 1999, following the activities of the working group, the Community Economic Development Investments Funds (CEDIF) programme was established through an amendment to the 1993 Act to address the barriers identified.1
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. While the original Act established legislative incentives for investors to invest in local communities, the CEDIF programme has become the vehicle through which they can more readily do so. As a result, more investors, businesses and communities have been utilizing the programme to stimulate local economic development and social enterprise.
Policy in Action
Key components to the CEDIF model include:2
- 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. Currently social enterprise is not a legally recognized corporate structure in Canada; however, social enterprise has leveraged the CEDIF programme to raise equity capital. For example, fair trade and energy-related ventures have successfully raised equity capital in ways previously not met by traditional market or philanthropic mechanisms.
- 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.
- 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.
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 Nova Scotia Securities Commission (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.3 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.4
CEDIFs can be initiated by a single enterprise looking to access direct equity capital or by a local intermediary with a broader community development mission. In the first option, a single organization takes on the form of a CEDIF to raise equity capital for its specific business objectives. In the second option, CEDIFs can be developed as a “blind pool” where investors’ funds are aggregated and provided to local businesses on a rolling basis by the intermediary, which then provides a single return to the investors. New Dawn Enterprises provides a useful example of the blind pool option working for social enterprises (see the “CEDIFs on the Ground” box in this section for more details).
Impact to Date
Having been in existence for over 10 years, the CEDIF programme provides a unique example of a long-term government intervention in support of social enterprise. As of 2012, more than CAD 49 million (US$ 48 million) has been raised from over 4,000 residents throughout the province, a notable success for Nova Scotia considering its population of less than 1 million residents. Additionally, throughout the duration of the programme, only three business ventures out of the more than 120 that received investments have failed.
Since its inception in 1999, total funds raised have grown at a 44% average annual growth rate. In 1999, CEDIFs across the province raised CAD 1.1 million (US$ 1 million) from 261 investors, compared with CAD 7.5 million (US$ 7.4 million) from 914 investors in 2012.5 The programme continues to gain traction among individuals throughout Nova Scotia as it becomes a demonstrated and viable investment option.
Policy Recommendations for Scaling Social Innovation
The CEDIF programme has successfully fostered social innovation and social entrepreneurship within Nova Scotia’s local context and provides several insights for policy-makers exploring ways to grow and direct private capital:
Reduce the transaction costs of investment opportunities
The CEDIF model has proven to be a powerful financing tool to develop local deal flow and investment opportunities in communities underserved by traditional financial 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, encouraging stakeholders to engage in the market.
Reinforce current investment activities by incorporating other innovations
Given social enterprises’ use of the programme to raise equity capital, a valuable opportunity to apply the CEDIF model towards new social investment products exists. Specific interest has appeared around the incorporation of social impact bonds to address the unique financing needs of social enterprise. Additionally, this vision to develop a supportive environment for social enterprise is seen in recently enacted legislation, the 2012 Community Interest Companies Act. The Act aims to support social entrepreneurs through new legal designations and corporate forms.6 This legislation will undoubtedly complement the CEDIF programme and continue to provide new opportunities for social enterprise in Nova Scotia.
Identify opportunities to engage new investors and generate larger supplies of capital
The programme could grow in scale and scope by opening up eligibility to corporate and institutional investors. While increasing the pool this way could raise costs and require more training to financial and investment professionals, it could also provide innovative tiered-investment structures and allow for the development of new financing tools to fund public infrastructure projects, an activity currently not permitted through CEDIFs.
New Dawn Enterprises
New Dawn Enterprises is Canada’s oldest dedicated community economic development corporation, established in Sydney, Nova Scotia in 1976. Founded to confront the socio-economic challenges in Cape Breton’s coal and steel industries, New Dawn identifies and addresses community needs by developing and operating local businesses.
New Dawn Enterprises has participated in the CEDIF programme since 2004, acting as a local intermediary for investors from Cape Breton looking to invest in their community. In seven years New Dawn has raised nearly CAD 7 million (US$ 6.9 million) from 792 investments, averaging CAD 8,690 (US$ 8,540) per investment. What makes New Dawn unique is its commitment to pay investors dividends of between 2.5% and 4.23% semi-annually in addition to redeeming investors’ shares after 5 years.
New Dawn’s investments have employed 175 local community members in businesses that serve over 600 people per day, creating an economic impact estimated to be in excess of CAD 150 million (US$ 147 million).