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Canadian Government removes tax barriers for startup VC

34 points by faramarz 17y ago

faramarz 17y ago
More take on this from the GlobeAndMail http://www.theglobeandmail.com/report-on-business/venture-capital-changes-offer-leg-up/article1491872/ http://www.theglobeandmail.com/report-on-business/venture-ca... Onerous hurdles that have kept foreign venture capital funds from investing in Canada have been lifted, providing access to billions of dollars that were out of reach for promising startups desperate for cash to fund their development. Thursday's federal budget struck down a rule that said foreign investors had to pay a 25-per-cent tax on any capital gains made when a Canadian investment was sold, unless they filled out paperwork to receive an exemption. Each individual investor in a fund – there could be thousands in each – had to personally fill out the forms, and then wait months for a reply. Once they received an exemption, they had to file a return with Canadian tax authorities informing them of the exception. “All of the complications made investors perceive Canada as not being conducive to capital,” said John Ruffolo, the leader of Deloitte's technology practice in Canada. “U.S. venture capitalists just said ‘Forget it, I'll give my money to Israel or India where it's actually wanted.'“ Deloitte did a study in 2007 and found American investors considered Canada the worst place to invest in the developed world “by an overwhelming and massive margin” because of the rules. While the changes won't automatically lead to a flood of investment, any help is welcome in an industry that has seen sharp declines. “There aren't 20 deals just sitting there waiting to be had,” Mr. Ruffolo said. “But what happens now is the large funds in Boston and Silicon Valley will once again take a look at Canada.” The Canadian Venture Capital Association (CVCA) said 2009 was the sector's worst year in more than a decade, as investments slipped by 27 per cent to $1-billion. The amount invested per firm was 40-per-cent lower than obtained by U.S. counterparts, the widest gap in Canada-U.S financings since 2005. “The barriers we had in place left Canadian companies undercapitalized,” said CVCA president Gregory Smith, who has been lobbying for the change for seven years. “This hasn't just been an issue about an economic crisis. Other countries have been more aggressive in supporting the ecosystems where venture capitalists operate.” Carol Leaman has seen the effects firsthand. As chief executive officer of PostRank, a Waterloo, Ont.-based social media analytics company, she had a slew of U.S. suitors “kicking the tires” when she sought financing in 2008. Their message was the same – we're interested, but it's too complicated to bother. “I can't tell you the number of times we heard that they'd like to invest but the paperwork was just too much,” she said. “There were just too many hoops, it made it virtually impossible. So you rely on local VCs, and there aren't that many.” While many say the changes were needed, Canadian venture capitalist Mark McQueen cautioned that it's just one piece of a larger solution to the industry's problems. Pension funds have stepped away from early-stage financing, and governments haven't stepped in to fund companies at their earliest stages of development. He said a more meaningful move would be for the government to set aside $300-million and create 10 funds, to become self-funding as investments become commercialized. “The industry needs to be restocked with capital,” said Mr. McQueen, CEO of Wellington Financial. “Show me one U.S.-funded deal [in Canada] that did not have Canadians in earlier. Without money early, you won't bring in the bigger investors.”
strebler 17y ago
That's great, a few months ago I saw a US VC overview of "investing in Canada"...it was scary. A common route is to use a whole whack of sibling companies (like 3 or 4) to transfer the money, it was a mess. Their conclusion: just move to the US, it's easier.
- smokinn 17y ago
  Really? Investing in Canada must be really bad then because moving to the US is not easy. (At least not if you aren't sponsored by BigCo whose large legal department will take care of the insane paperwork for you)
  - mock 17y ago
    If you have a degree and a job offer, as a Canadian you can apply for a NAFTA visa at the border - it's not a sure thing, but it usually isn't that much hassle.
- mock 17y ago
  There are close to a dozen US angel investors in a company I co-founded in Canada - to my knowledge (and I'm pretty sure it would have come up) none of them had to go through anything particularly onerous in order to give us money. Two of those angels also sat on our board, and were pleasantly surprised to find out the difference in liability as board members between Canada and the US. Previous startups I have worked for in Canada have all gone south of the border to raise either VC or Angel funding, so I suspect that this problem is somewhat over hyped. That said, everyone likes to remove friction (and accounting/legal costs) from raising money, so the change in law is a good thing. As another aside, a Canadian company can multiply investment (certainly at the level of Angel investment) by as much as three times thanks to various Canadian R&D programs (IRAP and SRED), and Canadian investors usually qualify for the lifetime capital gains exemption, which can make an exit even more appealing (who doesn't love a tax break?). So there are some good reasons to invest up here.
liamk 17y ago
It seems Arrington enjoys writing inflammatory articles to foment comments from his readership. Based on his responses to comments it seems he's not really interested in feedback, debate or facts.
- faramarz 17y ago
  haha It's all in good humour. I did post a more editorial piece here for a better perspective.
- mock 17y ago
  He just seems kind of ignorant really. My experience is certainly limited to the west coast, but I've been around for a while both as a founder and early stage employee in plenty of startups, and I've yet to see one that didn't eventually take US based investment. Our biggest problems is that there aren't enough local angels and the local VCs aren't all that great - which is why everyone past a certain stage goes south to raise funds. And this is great news, as it will make pitching those investors easier.

34 points by faramarz 17y ago

More take on this from the GlobeAndMail http://www.theglobeandmail.com/report-on-business/venture-capital-changes-offer-leg-up/article1491872/ http://www.theglobeandmail.com/report-on-business/venture-ca... Onerous hurdles that have kept foreign venture capital funds from investing in Canada have been lifted, providing access to billions of dollars that were out of reach for promising startups desperate for cash to fund their development. Thursday's federal budget struck down a rule that said foreign investors had to pay a 25-per-cent tax on any capital gains made when a Canadian investment was sold, unless they filled out paperwork to receive an exemption. Each individual investor in a fund – there could be thousands in each – had to personally fill out the forms, and then wait months for a reply. Once they received an exemption, they had to file a return with Canadian tax authorities informing them of the exception. “All of the complications made investors perceive Canada as not being conducive to capital,” said John Ruffolo, the leader of Deloitte's technology practice in Canada. “U.S. venture capitalists just said ‘Forget it, I'll give my money to Israel or India where it's actually wanted.'“ Deloitte did a study in 2007 and found American investors considered Canada the worst place to invest in the developed world “by an overwhelming and massive margin” because of the rules. While the changes won't automatically lead to a flood of investment, any help is welcome in an industry that has seen sharp declines. “There aren't 20 deals just sitting there waiting to be had,” Mr. Ruffolo said. “But what happens now is the large funds in Boston and Silicon Valley will once again take a look at Canada.” The Canadian Venture Capital Association (CVCA) said 2009 was the sector's worst year in more than a decade, as investments slipped by 27 per cent to $1-billion. The amount invested per firm was 40-per-cent lower than obtained by U.S. counterparts, the widest gap in Canada-U.S financings since 2005. “The barriers we had in place left Canadian companies undercapitalized,” said CVCA president Gregory Smith, who has been lobbying for the change for seven years. “This hasn't just been an issue about an economic crisis. Other countries have been more aggressive in supporting the ecosystems where venture capitalists operate.” Carol Leaman has seen the effects firsthand. As chief executive officer of PostRank, a Waterloo, Ont.-based social media analytics company, she had a slew of U.S. suitors “kicking the tires” when she sought financing in 2008. Their message was the same – we're interested, but it's too complicated to bother. “I can't tell you the number of times we heard that they'd like to invest but the paperwork was just too much,” she said. “There were just too many hoops, it made it virtually impossible. So you rely on local VCs, and there aren't that many.” While many say the changes were needed, Canadian venture capitalist Mark McQueen cautioned that it's just one piece of a larger solution to the industry's problems. Pension funds have stepped away from early-stage financing, and governments haven't stepped in to fund companies at their earliest stages of development. He said a more meaningful move would be for the government to set aside $300-million and create 10 funds, to become self-funding as investments become commercialized. “The industry needs to be restocked with capital,” said Mr. McQueen, CEO of Wellington Financial. “Show me one U.S.-funded deal [in Canada] that did not have Canadians in earlier. Without money early, you won't bring in the bigger investors.”

strebler 17y ago

That's great, a few months ago I saw a US VC overview of "investing in Canada"...it was scary. A common route is to use a whole whack of sibling companies (like 3 or 4) to transfer the money, it was a mess. Their conclusion: just move to the US, it's easier.

smokinn 17y ago
Really? Investing in Canada must be really bad then because moving to the US is not easy. (At least not if you aren't sponsored by BigCo whose large legal department will take care of the insane paperwork for you)
- mock 17y ago
  If you have a degree and a job offer, as a Canadian you can apply for a NAFTA visa at the border - it's not a sure thing, but it usually isn't that much hassle.
mock 17y ago
There are close to a dozen US angel investors in a company I co-founded in Canada - to my knowledge (and I'm pretty sure it would have come up) none of them had to go through anything particularly onerous in order to give us money. Two of those angels also sat on our board, and were pleasantly surprised to find out the difference in liability as board members between Canada and the US. Previous startups I have worked for in Canada have all gone south of the border to raise either VC or Angel funding, so I suspect that this problem is somewhat over hyped. That said, everyone likes to remove friction (and accounting/legal costs) from raising money, so the change in law is a good thing. As another aside, a Canadian company can multiply investment (certainly at the level of Angel investment) by as much as three times thanks to various Canadian R&D programs (IRAP and SRED), and Canadian investors usually qualify for the lifetime capital gains exemption, which can make an exit even more appealing (who doesn't love a tax break?). So there are some good reasons to invest up here.

liamk 17y ago

It seems Arrington enjoys writing inflammatory articles to foment comments from his readership. Based on his responses to comments it seems he's not really interested in feedback, debate or facts.

faramarz 17y ago
haha It's all in good humour. I did post a more editorial piece here for a better perspective.
mock 17y ago
He just seems kind of ignorant really. My experience is certainly limited to the west coast, but I've been around for a while both as a founder and early stage employee in plenty of startups, and I've yet to see one that didn't eventually take US based investment. Our biggest problems is that there aren't enough local angels and the local VCs aren't all that great - which is why everyone past a certain stage goes south to raise funds. And this is great news, as it will make pitching those investors easier.