Canada Open For Business with Elimination of Section 116
The Canadian federal government tabled their budget for 2010 and sent a clear message to international investors that Canada is clearly open for business.
In the budget, the government removed the Section 116 tax barrier, a barrier that has prevented Canadian emerging technology companies from obtaining international investment dollars to be truly globally competitive. A summary of Section 116, courtesy of Deloitte (www.deloitte.ca) , is as follows:
Withholding and Section 116 certificate process — The overwhelming majority of foreign VCs are not subject to Canadian tax when they sell an investment, but face a delay of many months to work through the Section 116 tax clearance process until funds can freely flow to them. Many foreign VCs are structured such that each of the investors in the VC — sometimes hundreds or even thousands — is subject to this clearance process as if they held the investment directly. This delay results in lower returns and frequently causes direct financial loss to investors. Canadians who invest in the United States, the United Kingdom and other major global markets do not face such taxes or delays from red tape.
Requirement to file Canadian tax returns by foreigners who don’t owe taxes creates hundreds of pages of unnecessary paperwork — Canada imposed tax filing requirements in circumstances where no taxes were payable by these investors. When a foreign VC sells an investment, each investor of the foreign VC has to file a Canadian tax return even if they don’t owe any taxes. This results in literally hundreds of pages of documents that are required for signature and processing for a single sale. This tax return filing issue also applies to certain Canadian public companies.
What does this mean for emerging technology companies raising funds from foreign investors from the US and abroad? It means those companies with high potential will be able to more easily attract foreign investors. It means that more foreign capital can come into Canada to invest in some of our leading knowledge based enterprises when large amounts of capital are still lacking. It also means that Canada can remain and grow competitively in the global marketplace, showing the world that we are innovators most innovative people and companies in the world.
If you would like more information on Section 116 and the federal budget, there are a plethora of resources including the Government of Canada website. Many of OCRI’s members and partners also have commentary and position papers including the CVCA (www.cvca.ca), BIOTECanada (www.biotech.ca) , CATA Alliance (www.cata.ca) to name just a few. Watch for upcoming professional development sessions from the Investment and Commercialization Group at OCRI (www.ocri.ca/investment ) to further educate CEO’s of emerging technology companies in Ottawa about the impact of this change on raising capital.
Comments
Looks like the government has seen the light at last. The sad thing is that it took them so long to realize this rule is quite ineffective. Maybe it was just too hard for them to admit their mistake… I hope foreign investors will take a second look at our market and they’ll start investing again.
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