Last week, included in the Canadian Federal Budget was an amendment to the tax code eliminating the burden on foreign investors to determine Canadian tax and file Canadian income tax returns when selling Canadian companies – The elimination of Section 116.
This is an incredibly positive step since it frees capital to flow to early stage Canadian startups from US venture capitalists and individual investors. That’s the win. Previously, for US VCs all the lawyering and paperwork made doing a deal in Canada burdensome if not downright impossible since the filing requirements extended to the original investors into the VC fund and can number in the hundreds or thousands. Not to mention anything about funds of funds where the complexity compounds. This made the deal count low and pushed the deal size up, way up to a point where most US VCs only considered investing in a much later stage, lower risk and higher placement expansion round. This of course ads insult to injury since most Canadian “early stage” VCs have the risk profile of a pensioner.
Early stage investments in Canadian startups have been coming from from government grants and from individual angels and a growing number or organized angel networks. These groups have been carrying the load for what would be/could be an institutional investment industry here. I recently watched companies pitch an angel network for million dollar rounds and was left wondering where the VCs were?
The audio for the webinar is available as well.
I have to admit that the victory is somewhat bittersweet. Sweet because it is progress, bitter because it took so long to fix and there is so much more to be done. I hope with this one step at least more young companies find the funding they need which will inevitably grow the ecosystem. Canada needs many more startups, more learning and evolution. The best way I can imagine to learn it is to do it. Hopefully this will help.
I’m talking to some VC friends in Boston this week and I’ll hopefully get their take. I’ll update when I have.
Looks as though our government has seen the light at last. Although it’s quite sad, that it took them so long to realize this rule is pretty ineffective and remove it. I hope foreign investors won’t be avoiding our market any longer.
I’ve also read an interview with Stephen Horwitz, where he discussed these good news, I hope he was right to presume that foreign VCs will take a second look.
The lawyer’s I’ve spoken to recently have told me repeatedly that section 116 was never a definitive reason to do or not do a deal in Canada, but that it was emblematic of the climate for government vs. true free enterprise(especially disruptive ones) that is the real issue.
This sounds even more depressing than I originally thought but it is indeed one step int he right direction. At this point I’ll take it.