The health of the venture capital market in Canada is threatened by a cumbersome tax regime that discourages foreign VC firms from investing in Canadian companies — and it’s time the federal government fixes the situation. That’s the opinion of 147 CEOs and business leaders surveyed in a recent web poll by Compas Inc.
Professional services firm Deloitte published a study this month on global VC trends showing that investors are deterred by Canada’s unfavourable tax regime, which results in reams of unnecessary paperwork and delays that can lower returns for VC firms. Encouraging foreign investment in early-stage Canadian companies has become more important than ever, given the country’s weakening domestic VC landscape. The amount of capital raised by Canadian VC firms has dropped to around $1.6 billion in 2006 from more than $3 billion in 2002, according to Deloitte.
The CEOs in the Compas poll overwhelmingly agreed that a robust market for venture capital is crucial for Canada’s economic growth. “The importance of this issue cannot be overestimated,” wrote one respondent. “This is more than tragic, considering that virtually all private sector job growth in our economy is coming from the small and medium sized enterprises.”
In previous Compas polls, the CEOs have generally been favourable toward federal government policy. Not so in this case. Asked to grade the government’s handling of tax policies related to foreign VC investments on a 100-point scale, the CEOs gave the government a score of just 50.
The CEOs also agreed the problem is an urgent matter that should be addressed immediately by the federal government. Moving quickly to encourage investment is necessary to prevent entrepreneurs from leaving Canada due to the lack of funding. “This government pays a lot of lip service to the importance of a strong business environment, but they are very slow to put any actions in place,” wrote one respondent. “By that time, the innovators will have gone elsewhere and once again Canada will be the loser.”