Feds to tackle Section 116 in Budget

Today’s Throne Speech contained a passage that will excite our friends John Ruffolo, of Deloitte, Stephen Hurwitz, of law firm Choate in Boston and Yaletown’s Steve Hnatiuk (Chair of the CVCA Tax Policy Committee). For several years, these three, along with the help of countless others in the venture capital industry, have tried to help the Federal Government understand that Section 116 of the Tax Act served as an unnecessary barrier to foreign investment.

In a nutshell, Section 116 required the limited partners of U.S.-based venture capital funds to make individual tax filings with Canadian tax authorities when a Canadian VC investment was sold, even though there would be no tax to pay as a result of bilateral tax treaties. To some, this was such a hassle that certain VC firms wouldn’t look to invest in Canada as a result.

The CVCA has long lobbied to have this dealt with, as one facet in our broad Commercializtion Support Program.

In yesterday’s Throne Speech, this reference caught everyone’s attention:

Our Government will open Canada’s doors further to venture capital and to foreign investment in key sectors, including the satellite and telecommunications industries, giving Canadian firms access to the funds and expertise they need.

That can only mean one thing in VC-land.

This isn’t the first time the Conservative government has tried to fix the problem. It was specifically addressed by Finance Minister Jim Flaherty in the February 2008 Federal Budget, and although that budget was passed by Parliament, something went askew at the Department of Finance and the public servants didn’t implement the policy change. They were worried about negative “unintended consequences”.

With the precision of the Throne Speech, it is assured that tomorrow’s budget will again deal with 116 (see prior post “Flaherty to VCs: “Don’t expect too much” in Budget” Feb 18-10).

Once more, with feeling.

For some in the industry, too much is made of the impact of Section 116. Three years ago, for example, 41% of the capital raised for Canadian VC deals was provided by U.S.-based funds. That’s a high percentage, even with the Section 116 “barrier” in place.

Although Canada’s venture capital crisis won’t be solved with this one very positive step, it is hoped that Finance’s Budgetary “do-over” will represent a new focus in Ottawa on the current drought in Canada’s Innovation Economy.

It can’t come too soon, as VC investments in Canadian firms hit a 13 year low in 2009, and there’s no end in sight.

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