Budget ‘removes obstacles’ to foreign investment in Canadian tech firms

Reactions to the 2010 federal budget announced yesterday by Finance Minister Jim Flaherty were wide and varied in Canada’s business and IT community.

While some praised the budget for removing obstacles to foreign investment in Canadian tech firms, others panned it for meagre funding of information and communication technology (ICT) projects.

Section 116 hurdle removed

Some experts welcomed the budget’s removal of barriers to foreign venture capital.

The biggest victory is the eradication of the Section 116 tax clearance process, said John Ruffolo, global tax technology, media and telecommunications leader at Deloitte in Toronto.

“This has a personal significance for me, because it’s a change I’ve been pushing for four years with the government directly,” Ruffolo told ITBusiness.ca.

Section 116 clearance, he said, was a huge hurdle to overseas venture capital investment in emerging Canadian tech firms.

He said if a U.S. venture capital fund that invested in a Canadian private technology company sold the shares of that company — Canada required them to go through a Section 116 clearance process.

“This means each of the hundreds or even thousands of investors in that VC fund would have to provide information to Revenue Canada to determine whether they were subject to taxation on any gain from the disposal of those shares.”

This was just a meaningless bureaucratic burden imposed on them, he said, as “in most cases they were never taxable.”

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To make matters worse, Ruffolo said, each investor would be required to file an income tax return, just to show the Canadian government they didn’t have to pay any taxes. “This often literally meant processing and signing of hundreds of pages of documents for a single sale.”

The fallout of this irrational, cumbersome process was that many overseas investors just decided not to invest in Canadian tech companies — it just wasn’t worth the hassle.

Essentially, the Deloitte exec said, the Section 116 clearance process sent a message to foreign VCs that we didn’t want their money. “The removal of the Section 116 barrier has paved the way for these funds to invest in Canadian tech companies again.”

Ruffolo’s view is echoed by Terry Matthews, chairman of Wesley Clover Corp., a Kanata, Ont.-based firm that manages investments in technology, real-estate and the leisure industries.

The budget, said Matthews in a statement, sends a message to international investors that Canada is open for business.

He said the changes also remove what were perceived to be insurmountable barriers for many venture capitalists, who considered previous administrative requirements and economic delays strong deterrents to investing in Canada. 

Another expert sees this change as a bonanza for emerging tech firms in Canada.

The removal of the Section 116 tax barrier enables such companies “to access deep pools of international capital and the vast global customer markets to which those pools are connected,”  said Stephen Hurwitz, Partner, Choate Hall & Stewart LLP in Boston in a statement. 

New capital sources

Fixed satellite services operator, Ottawa-based Telesat, also praised the budget for what it called its “commitment to remove foreign ownership restrictions on Canadian satellite operators.” 

It noted that while Canada’s satellite communications market has been fully open to foreign operators for more than ten years, satellite companies here remain subject to ownership restrictions.

This places them at a substantial disadvantage to larger foreign competitors in today’s highly competitive global market, noted Dan Goldberg, Telesat’s president and CEO.

He said his firm “strongly supports” the government’s decision to remove the foreign investment restrictions for our industry. “We need to increase our scale in an industry where size confers key competitive advantages.”

“Absolute neglect” of ICT

Not everyone was as sanguine about the easing or removal of several foreign ownership restrictions.

Dan McTeague, consumer affairs critic of the Liberal Party slammed what he called “an open season on foreign investment” and foreign control of telecom assets in Canada.

“I’m not so sure that’s a well thought out plan,” he said.

McTeague was also sceptical about the changes in the small business tax rate, announced by Flaherty.

The Federal Finance Minister said his government had provided “permanent tax relief to Canadian small businesses” by increasing the amount of income eligible for the small-business tax rate from $300,000 to $400,000, and then to $500,000.

“I’m not sure how effective that will be,” the Liberal party’s consumer affairs critic said.  “It doesn’t matter what kind of tax incentives you provide if the economy is weak.”

McTeague called for increased government spending to allow small businesses to hire more workers and start achieving success.  “They need to an environment for business to succeed, just holding out a carrot won’t help.”

Other corporate tax “reliefs” offered in this budget are the dropping of the federal general corporate income tax rate from more than 22 per cent in 2007 to 15 per cent in 2012.

“Our government is also cooperating effectively with the provinces to reduce business taxes overall,” Flaherty announced. “As a result, this year Canada will achieve the lowest overall tax rate on new business investment in the G7. By 2012 Canada will also have the lowest statutory corporate income tax rate in the G7.”

McTeague said despite the government paying lip service to the digital economy in the throne speech, issues such as increasing penetration and use of Internet haven’t really been addressed by the budget. “There’s no emphasis on rural Canada.” 

Telecom analyst Roberta Fox welcomed the changes in the small business tax rate. “It’s a great move; you can relate to this, because you get rewarded for being successful.”
“The [small business] tax rate has been $300,000 for as long as I can remember and it was time for a change,” said Fox, who is president and senior partner at Markham, Ont.-based  Fox Group Consulting.

She said instead of paying more taxes, small business owners would now be able to funnel  the money saved back into their company. “You can have more growth, which ultimately means more revenue. It could even mean more employment as it’s likely you’ll hire more people to help you out.”

Fox said while the ICT sector hasn’t been mentioned at all in the context of stimulus spending, that doesn’t mean the sector will not see government money.

The analyst said there was a marked absence in the budget of technology initiatives in health care. “I would like to see plans for spending on electronic health records. But it’s likely they didn’t want to touch that because it’s been such a sensitive political issue lately.”

Youth programs

Other budget highlights include provisions for young workers, who have been significantly affected by the recession.

Budget 2010 invests $108 million over three years to assist these young people looking to gain skills and experience. This includes additional support for the education of First Nations children and youth.

The Youth Employment Strategy is being offered as a way for recent post-secondary graduates to obtain relevant work experience in their field.

The budget provides a one-year $30-million increase in funding for the Career Focus component of the Youth Employment Strategy.

The government says this measure will provide additional support to Canadian employers and organizations willing to offer valuable career-related work experience to college and university graduates, including more internships in green sectors of the economy.

The idea is to enable more young Canadians to get that vital first job in their field of study.

Supporting young entrepreneurs

Budget 2010 also provides $10 million in 2009–10 to the Canadian Youth Business Foundation.
The Foundation is a national organization whose mandate is to help young Canadians become successful entrepreneurs by providing mentorship, learning resources and start-up financing where commercial lending is unavailable.

Likewise, a one-year $30-million increase in funding has been provided to Skills Link.
This component of the Youth Employment Strategy was developed to assist youth from challenging backgrounds — persons with disabilities, children of single parents, Aboriginal Canadians, recent immigrants, those living in rural and remote areas, and those who have not completed high school.

This goal is will provide more opportunities for these young Canadians to successfully join the labour market.

To what extent will these provisions help youth get the career skills, training and resources they require?

“It all depends on how well the funds are directed and managed, and the degree of accessibility of the programs that set up,” said Jennifer Perrier-Knox, senior research analyst at Info-Tech Research Group in London, Ont. “Money is spent on these types of initiatives all the time, but doesn’t get to the right people or have a lasting impact because the quality of the program is poor.”

Likewise in the area of hi-tech research, the govt is providing $45 million over five years to establish a post-doctoral fellowship program to help attract the research leaders of tomorrow to Canada. It’s also delivering $222 million in funding over five years to strengthen the research taking place at TRIUMF, Canada’s national laboratory for nuclear and particle physics research. It’s also providing a total of $497 million over five years to develop the RADARSAT Constellation Mission.

Again how significant an impact these disbursements will have on higher research will depend on how the money is managed, Perrier-Knox said. But she said an injection of cash is always a boon to higher research, “which is often left scrambling for funding.”

Does research really benefit?

Likewise, the combined annual budget of Canada’s three research granting councils – the SSHRC, NSERC and the CIHR – has been hiked by $32 million per year in 2010-11.

However, as one commentator points out, last year’s budget imposed a $43 million cut on the three councils for 2010-11. So the net effect is that the cuts have been mitigated to $11 million – not exactly a bonanza for research.

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