Canada's tech industry wants tax law change: By Peter Moreira, Reporter, Dealscape
December 2, 2009

Canada's technology industry has launched a campaign to amend a tax law it says is discouraging U.S. venture capital firms from investing in Canadian startups.

The "116 Campaign" will pressure the Canadian government to end the restrictive nature of Section 116 of the country's tax code, which increases red tape for foreign funds when exiting Canadian investments.

CATA Alliance, the country's largest high-tech association, issued a statement on Tuesday saying it is urging its members to write, e-mail or fax their members of Parliament to amend the rule.

Section 116 requires foreign investors in a Canadian company to fill out a form issued by one of 45 Canadian government offices if the target company is sold. However, the law does not simply pertain to just the venture firm, but all its limited partners as well. Each investor in a VC fund has to complete the form, which can pose a bureaucratic hurdle to completing a deal if a large fund with many limited partners is involved. In one instance frequently cited by the Canadian VC industry, almost 900 individuals had to complete the forms, and many of them lived nowhere near one of these 45 offices.

Furthermore, 25% of the proceeds from the transaction must be withheld until the government issues all the Section 116 clearance certificates.

"Our under-capitalized companies are trying to compete against U.S. firms that have about three times their funding," said CATA president John Reid in the statement. "In the meantime, we are making American venture capital firms go through a thorn wall of red tape, in the shape of a 'Section 116' clearance certificate."

 

Canada's Venture Capital & Private Equity Association has been urging the Canadian government to amend Section 116 as one means of curing the crisis in the industry. The association said last month that third-quarter VC investments were the lowest in 14 years while VC fundraising was the lowest on record (subscribers, see a related story from The Deal Pipeline). - Peter Moreira