Flaherty to VCs: "Don't expect too much" in Budget

Venture funding is at a 14 year low in Canada…do I hear 15?

Given the state of government budget deficits, no one will be surprised to learn that at last night’s Reseau Capital event, Federal Finance Minister Jim Flaherty made it clear that the cavalry was not on its way. According to a little birdie who was there, Minister Flaherty had this specific message:

“There will be some initiatives with respect to venture capital in the Budget…. But don’t expect too much.”

The accepted wisdom is that Minister Flaherty will re-announce that the government is fixing the bureaucratic challenges provided by Section 116 of the Tax Act. For the uninitiated, Section 116 is the part of the Act that requires the limited partners of foreign VC funds to file individual tax returns — even though they ultimately have no tax to pay to CRA — after they exit a deal involving a Canadian-based company. This means that some funds have to file up to 700 documents on behalf of their LPs, which can take up to 9 months to have processed in Ottawa; all when there’s no tax to pay given the tax treaties that are in place between many industrialized nations.

Although Minister Flaherty tried valliantly to solve the problem in an earlier Budget speech, the Minister’s own Officials went on to ignore the fact that Parliament passed a Budget that was meant to fix Section 116.

Isn’t defying the House of Commons illegal? Apparently not if you’re at the Department of Finance.

As such, we’ll likely hear about a “new fix”. Although Section 116 gets tremendous attention in Ottawa, it is but one of the five initiatives we’ve been pushing in Ottawa since 2008 (see prior post “CVCA letters to Messers Flaherty, Clement and Ignatief” Dec 26-08).

There may also be some more money for the Business Development Bank’s own VC portfolio. But, as many realize, that does little to help preserve what’s left of Canada’s venture capital industry. It usually goes to support the BDC’s earlier private company investments (see prior post “Clement moves to fund BDC’s existing venture portfolio” June 15-09).

At the same event, the Quebec Economic Minister rightly touted the fact that Quebec has been devoting resources to stimulating the Innovation economy and venture capital; initiatives which are already starting to bear fruit according to figures released earlier by the Canadian Venture Capital and Private Equity Association.

Quebec attracted 43% of all Canadian VC investments in 2009 — about double its population base. A fantastic performance, and long ago predicted in this space.

A story in the Financial Post highlighted the welcome news that the House of Commons Standing Committee on Finance is paying attention to Canada’s VC Crisis; which means domestic VC firms and Canada’s innovating entrepreneurs have a few more allies to count on:

[VentureLink] will be going over the documents to ascertain whether Ottawa has followed the recommendations contained in the report of the Standing Committee on Finance released last December.

In that report, the committee recommended “the federal government work with the venture capital industry to identify new sources of financing and examine the effectiveness of existing tax incentives related to financing. Moreover, the government should review the feasibility of increases to the Labour-sponsored funds tax credit to 20% of eligible investments, to a maximum eligible investment of $20,000.”

Fingers crossed on all fronts, but don’t expect much.

MRM
(disclosure – although I am a Director of the CVCA, these views are my own)