Ontario’s 10-year tax break for certain tech start-ups “far from perfect”

An Ontario bill aiming to help tech start-ups clear the hurdle in bringing ideas from the halls of academia to the streets of the commercial marketplace may fall short of its intended goal, according to critics.

Bill 100, or the Ideas for the Future Act, awards new information and communications technology (ICT) companies that commercialize Canadian intellectual property (IP) from research institutions and universities a 10-year tax exemption. The bill passed into law last month. Now certain tech companies founded between March 24, 2008 and March 25, 2012 can apply for the exemption.

But the one-decade tax break is likely too short to actually make a difference, say some entrepreneurs. Some are also suggesting the bill’s rules are too tough and the government isn’t recognizing the full cost of bringing a piece of IP to the market.

“Is 10 years long enough? Our suggestion would be maybe not,” says Lynda Leonard, vice president of the Information Technology Association of Canada (ITAC). “It’s a long haul for anyone in an R&D intensive space (to commercialize), and we’re pretty swift at it.”

The Ottawa-based association asked some experienced entrepreneurs about the Ontario government’s tax holiday plan.

Though ITAC supports action to boost the business eco-system, it is concerned that the provincial government doesn’t fully understand just how long and painstaking the commercialization process can be.

In a white paper released Dec. 15, ITAC shares the opinions it collected from successful entrepreneurs. A developer of enterprise computer security software is among those who feel the 10-year timeline is too short.

“There may not be much consequence if it’s only 10 years,” says Brian O’Higgins, chief technology officer at Ottawa-based Third Brigade Inc. “Companies are not making money for 10 years if they are developing technology that’s coming out of the university.”

Many patents run out while companies are attempting to make money off the protected idea, he adds. Patents last for 17 years, and a tax holiday would be of more benefit if it were of equal length.

The long turn around time is even more grueling in industries that require a hard science approach of repeated tests, and learning from the failures. It can take years of this sort of process before a product is ever created, according to Darin Stahl, lead analyst with London, Ont.-based Info-Tech Research Group.

“I worry that 10 years might not be long enough for the realization of the goal,” he says. “If the intended goal is to increase the number of one- and two-year start-up companies, then fine. But if it is to really incubate innovation in Canada across the board, then there are some things to look at here.”  

While the tax break period may be too short, others are concerned it may be too restrictive. One of the rules disqualifies any corporation from receiving the tax break if there is any association or relation to another corporation.

That could cause problems for some qualifying companies seeking the exemption, says Paul Carenza, a partner with Ogilvy Renault LLP. Inventors could find themselves disqualified because a family member runs a different business, or a venture capitalist may have to limit investment to avoid any problems due to associations with other companies.

The Finance Ministry has adopted a different approach with this Act is than with other types of tax credits, Carenza says. “This is a complete exemption from the tax, rather than a tax reduction by tax credit.”

The Act’s intent is not to stop tech inventors if they happen to have a brother that runs a home renovations company, he adds. The intent is to stop established companies from setting up a new corporation to sell a product that might qualify for the tax break. That would be viewed as an abuse of the Act.

Further concerns were raised in ITAC’s white paper about the government’s focus on IP licensing as the lynch pin in the commercialization process. In fact, it is only one cog in a larger machine that relies on the gears of marketing, sales and finance departments to work.

It is a common misconception to think most ideas are created in research institutions and then developed for the commercial market by a private company, Leonard says. That is not often the case. Many entrepreneurs value the human side of the equation more than the IP side.

“It’s not just about licensing,” she says. “The equation for commercialization is beyond the license – there’s tremendous value in the researchers themselves as a vital talent pool for these organizations.”

Entrepreneurs echo Leonard in ITAC’s white paper. Adam Chowaniec, chairman of Ottawa-based Tundra Semiconductor says he can’t ever recall buying IP from an academic institution, but characterizes the talent pool in academia as invaluable.

The government places too much focus on the research and design component and not enough on sales, marketing, human resources and fnances, he says. “We worry about R&D tax credits and tax holidays, but really 70 per cent of your expenses are somewhere else.”

Another entrepreneur, Unis Lumin Inc. president John Breakey, says that government underestimates the degree of marketing needed to make a commercialization project successful.

“The government doesn’t recognize the selling component,” the Oakville, Ont.-based technology firm says. “They want to tax exempt the effort to develop IP, but not the marketing campaign you produce.”

South of the border, the role of sales is better recognized, he adds. But “sales” seems to be a dirty word in Canada, with public institutions focused almost entirely on technological development.

Though the bill has been passed into law, the regulations that further define who can apply for the tax exemption are still forthcoming from the Ministry.

Hopefully those will clear up some of the tough language limiting who is eligible, Carenza says. “They drafted it in a way that is overly broad. I am hopeful the regulations will provide some wiggle room.”

Only time can tell if the Act will be successful or not, Leonard says.  

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Jim Love, Chief Content Officer, IT World Canada

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Brian Jackson
Brian Jacksonhttp://www.itbusiness.ca
Editorial director of IT World Canada. Covering technology as it applies to business users. Multiple COPA award winner and now judge. Paddles a canoe as much as possible.

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