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.

Faced with an undercapitalized Canadian VC sector and the Section 116 restrictions, our emerging companies were either forced into premature public listings (often via a CPC mechanism) or had to concede that it made no sense to develop a knowledge economy-oriented enterprise here.

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.

In the March 4, 2010 budget the Harper government finally removed this steep barrier to major foreign capital and has provided our emerging companies with a much needed lifeline.  So now, at long last, the Canadian technology sector is finally open for business on the world stage!

FYI: Stephen Horwitz of Choate Hall and Stewart LLP eloquently summarized the vagaries of Section 116 in this article.

John McCulloch

John provides assistance to life sciences entrepreneurs in business strategy, management, intellectual property, financing and licensing. See more…