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Investors Welcome Canada's Tax 'Masterstroke'

Monday, March 8, 2010

Deloitte has applauded the Canadian government's decision to amend the Capital Gains Tax law to ease red tape on international investors, particularly venture capitalists, reestablishing Canada as a leading place to invest.

Responding to the Canadian budget, the tax advisory firm has said that changes to the definition of “taxable Canadian property” puts Canada at the top of the list of places to invest globally, removing previous disincentives to venture capitalists. “By amending the definition of 'taxable Canadian property' to exclude shares of Canadian private companies (where not more than 50% of their value is derived from real property in Canada, Canadian resource property or timber resource property), the government has significantly reduced administrative and, in some cases, economic barriers to foreign investment in Canadian-based innovation and technology,” Deloitte said.

Commenting, John Ruffolo, Global Tax Technology, Media & Telecommunications Leader, Deloitte, said:

“The changes in tax legislation announced in [the] budget are among the most significant changes to capital gains taxation since the introduction of taxation of capital gains in 1972. The Canadian government has listened to the financing community, understood the severity of the problem and removed the major tax barriers that have prevented critically needed international investment capital from crossing Canadian borders.”

Terry Matthews, Chairman, Wesley Clover, added:

“At a minimal cost to the government, this amendment will have an immediate, positive and direct impact on Canada’s ability to grow a robust Canadian technology industry. By sending a clear message to international investors that Canada is “open for business”, the government will make Canadian companies more attractive to foreign investors overnight. This will help Canadian companies raise the capital they need to achieve global leadership status.”

Deloitte notes that the change means a much more welcoming environment for foreign investors. In the vast majority of cases, non-residents who were not taxable on the disposition of their investments in such shares due to Canada’s broad international tax treaty network, are now exempt from tax under Canadian domestic law without having to apply for treaty relief. As a result, they are no longer required to comply with the Section 116 tax clearance certificate procedure or file a Canadian income tax return. The changes also remove what were perceived to be insurmountable barriers for many venture capitalists who considered the previous administrative requirements and economic delays for each investor to be strong deterrents to investing in Canada.

“The removal of the Section 116 tax barrier is a tax master stroke by the Canadian government enabling Canada’s emerging technology companies to access deep pools of international capital and the vast global customer markets to which those pools are connected," notes Stephen Hurwitz, Partner, Choate Hall & Stewart LLP in Boston. “I predict that over time this farsighted tax legislation will help propel Canada’s extraordinary technology into global industry leadership in numerous markets, and will likely be viewed in the future as a defining moment for the Harper government in Canadian innovation.”

Prior to the government's budget, in a 2007 survey of 528 venture capitalists from around the world by Deloitte and Canada’s Venture Capital & Private Equity Association (CVCA), 40% of US respondents and 28% of global respondents cited Canada’s unfavourable tax environment as a key reason for not investing in Canadian companies.