Canada: A tech leper no longer?

Easing rules on U.S. backers could be a boon to tech start-ups

Canada: A tech leper no longer?

Photograph by Mike Cassese/ Reuters

There has been plenty of hand-wringing about the need for Canada to develop a high-tech economy, one that encourages entrepreneurs to follow in the footsteps of Mike Lazaridis and Jim Balsillie, who built BlackBerry-maker Research in Motion into a global success story. But the effort has been long on talk and short on action. Until now. The Conservative government has finally taken a hatchet to some of the red tape that prevents budding young companies from accessing sufficient U.S. venture capital, the lifeblood of start-ups.

Previously, U.S. venture capital firms were forced to complete untold hours of tedious paperwork every time they wanted to cash out of a Canadian company and realize any profits. Section 116 of the tax code withheld 25 per cent of the returns from the sale of any company backed by American venture capital funds until each investor—which could number in the thousands—proved they were a foreign citizen. The process, which isn’t applied to Canadian venture capital firms investing in the U.S., routinely held up the sale process by several months, or even years, driving away potential investors.

Michael Arrington, a prominent American technology blogger, commended Ottawa’s move by suggesting Canada has finally become “less of a leper colony for tech entrepreneurs.” He wasn’t kidding. Deal activity in the venture capital market last year fell to its lowest level since the mid-1990s, according to the Canadian Venture Capital and Private Equity Association. Roughly $1 billion was invested across the county in 2009, down nearly 27 per cent from a year earlier. At the same time, the average Canadian firm with venture capital backing received about $3.1 million last year, less than 40 per cent of the dollars poured into their American counterparts. So while the federal government has taken an important step toward closing the gap, it will be some time before we can truly consider Canada a Silicon Valley of the North.

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