U.S. Venture Capital Industry Says No To Funding Canadian Innovation: Fingers Point to Canada’s failure to amend Section 116 Clearance certificate
November 29, 2009

December 8, 2009

Fingers Point to Canada's failure to amend Section 116 Clearance certificate

Contact: Emily Boucher, Media Adviser at eboucher@cata.ca or 613-236-6550

Ottawa, ON, Washington, D.C.... CATAAlliance, Canada's largest high tech association today launched an advocacy Campaign to eliminate cross-border tax laws that are blocking much-needed venture capital from reaching cash-starved Canadian high-tech companies.

"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 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.

A "Section 116" clearance certificate from one of 45 Canadian government offices that grant it is required for every investor in a US venture fund, and many funds have dozens or even hundreds of investors. A single stock deal can literally require hundreds of applications and hundreds of signatures. One US venture capital firm in a single transaction had to obtain almost 900 signatures in connection with a Section 116 processing.

The Campaign, known as the "116 Campaign" forms an integral part of the industry's Innovation Nation program, a program, under the tutelage of Canada's leading entrepreneur, Sir Terence  Matthews that lays out what we must do as a nation to move us from a 13th place ranking to first place in innovation rankings.

Mr. Reid noted that "Rather than capitalize on this opportunity and welcome this money, Canada's cross-border laws thwart them at every turn. We are imperiling our Innovation future and risk squandering investments in R&D and intellectual capital, all because of a failure to put a simply amendment in place, an amendment consistent with the practices of our trading partners".

"How U.S. Venture Capital Firms See Canada
In contrast to open policies (e.g., U.S., England, Australia), U.S. Venture capital firms face nightmarish red-tape and delays to achieve reciprocal treaty benefit in Canada. Inconsistent practices and procedures in these 45 Canadian offices, wholly unpredictable in their timing and requirements, leads to protracted waits of up to four or eight months (waits of one to two years are not unheard of) for US venture investors. Further, 25% of the gross sale proceeds must be withheld by the buyer from the outset until the Section 116 clearance certificate is granted and the proceeds then released to the US venture firm. When those withheld proceeds are in stock of a listed public company buyer, the stock value can plummet if during the long wait there is a decline in the public market, which can cost US investors thousands, if not millions, of dollars. To add insult to injury, usually more than 25% of the gross sales proceeds are withheld when in the form of shares to compensate for any potential downturn in the stock price while withheld.

These same US venture investors may also have to deliver copies of their prior US tax returns and must obtain Canadian taxpayer ID numbers and file Canadian income tax returns - even though in virtually every case no Canadian tax is ultimately due as most foreign parties are exempt under the treaty. Worse still, the charters of many US venture firms prohibit them from investing in countries where foreign or past private tax returns must be filed by their investors.

Because of these administrative burdens and economic risks of delay, many US venture investors just say no to investing in Canada. Is this how we wish to brand Canada to the world's financial community?
CATANet TV Interview, Sir Terence Matthews

Tom Houston, 116 Campaign champion, and Partner at Fraser Milner Casgrain LLP spoke to this issue and offered a simple solution, in a recent CATAnet TV video interview.

View Video

Houston, concludes, "We propose to amend the definition of TCP in subsection 248(1) to exclude the shares of private corporations, except for shares of private corporations whose value is specifically derived from real property, resource property, or timber property situated in Canada, adding, "This proposal would be consistent with how Canada currently taxes most gains realized by non-residents." Matthews concluded, "If Canada is to become an Innovation Nation, we've got to do a better job of supporting, growing and retaining our high tech companies and the people that power them."

++ Action Item
MP and Community Mobilization
Please send electronically and/or print out and fax the 116 Advocacy communiqué and follow up with a phone call to your local MP, media and network of contacts, inclusive of posting on your social media. In support of the communiqué, we are also providing upon request, a Discussion paper entitled. "Reforming Section 116: Key to Opening Borders to Foreign Venture Capital", authored by Stephen Hurwitz. Other supporting documentation is also available upon request. Please email jreid@cata.ca with VC Campaign in the subject line.
We will be sending shortly details of a TeleForum Conference Call to discuss the 116 Campaign, provide updates and offer a Q&A with industry experts.