Monday, March 08, 2010

Happy Days Are Here Again!

Why are so many newspace focused companies (for example, Odyssey Moon, founded by Canadian Bob Richards or PlanetSpace Corporation, which started out as the Canadian Arrow team competing for the Ansari X-Prize) possessors of such strong Canadian pedigrees but not officially Canadian based?

One of the reasons might be described in this recent post on the MaRS Blog by John McCulloch, under the headline "Open access for international investors" which states flatly that the culprit is a series of Canadian tax requirements known collectively as Section 116:
To shed further light on Kerri Golden’s excellent recent post, the stumbling block that has been removed in this case is the Section 116 – a series of tax requirements that imposed onerous restrictions on foreign investors in Canadian firms.
Of course, this post will not devolve into an argument that tax credits are the only key to building a knowledge economy. I've argued the exact opposite position as recently as my post Building a Competitive Business Environment Calls for More than Just Tax Credits.

However, the section 116 requirements do indeed seem onerous:
Under Section 116, a US venture capital company that wished to exit from an investment in a Canadian firm had to gather as many as 900 signatures from its limited partners, have each of them file income tax returns in Canada (even though no tax was due in Canada) and undergo a holding period that could have greatly undercut returns from a successful IPO.  Little wonder that the best funded and best managed VC firms on Earth decided that Canada was a no-go zone.  Incidentally, there is no such red tape for Canadian investors regarding US companies.
As part of their budget outline, the Conservative government has indicated the intention to remove the section 116 "tax barrier" by changing the definition of “taxable Canadian property” to exclude shares of Canadian private companies where not more than 50% of their value is derived from real property in Canada, Canadian resource property or timber resource property.

Essentially, this means that Canadian knowledge focused companies and start-ups can now solicit investors outside of Canada and no longer need to move to the US to utilize American or other foreign venture funds, just so long as the business is not too heavily focused on resources or property.

German Field Marshall Helmuth Carl Bernard von Moltke is supposed to have once said that "No battle plan ever survives contact with the enemy" and I supposed the same is true about budgets and budget promises made under a minority government. However, it is good to see the Canadian government finally beginning to address some of the tax and structural issues preventing Canadian knowledge industries such as the commercial space sector from growing into world class organizations providing Canadian jobs.

Now if only they'd listen to some of the ideas floating around regarding super flow-through tax credits being used to fund space commercialization activities.

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