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International investors: It’s now easier to fund Canada’s innovative start-ups

International investors: It’s now easier to fund Canada’s innovative start-ups

In yesterday’s federal budget, the Harper government announced significant changes in tax legislation that will make it much easier for US and other international venture capital investors to fund Canada’s most promising start-up companies.

These changes come at a most opportune time as the CVCA, Canada’s Venture Capital and Private Equity Industry Association, and their research partner Thomson Reuters recently reported that venture capital investment in 2009 reached its lowest level in thirteen years.

The tax changes are described in the press release from Deloitte &  Touche LLP, who worked with the CVCA in 2007 on a survey of 528 VCs from around the world that cited Canada’s unfavourable tax environment as a key reason for not investing in Canadian companies. Simply put, the changes eliminate the need for VC funds and their limited partner investors (some funds with hundreds or thousands of individual investors) from having to file Canadian tax returns and work through an administratively burdensome tax clearance process to avoid withholding taxes on income from sale of shares in a Canadian private company that usually was not taxable income to the foreign investor.

This is also great news for management teams in Canadian start-ups who should no longer need to wrestle with complex cross-border legal structures for their companies in order to meet the needs of both US and Canadian investors in an investor syndicate. Management teams can focus on finding the right global investor for their business and leveraging that investment to launch and grow their business.

Hats off to the federal government for an initiative that reduces administrative costs, has minimal impact on government revenues and most importantly provides Canadian companies with an advantage they need to attract global capital and compete on the world stage.