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March 5, 2010 / Danny Robinson

Section 116 filing requirements be gone!

On March 3rd, It was announced that Section 116 will finally been fixed in the most recent Canadian budget.

Many US venture firms or angel investors are not even aware of the reporting requirements under Canadian section 116 of the Income Tax Act.  But those that are, have often foregone investing in Canadian private companies because of it.  It’s been a big barrier, and it’s finally been removed.

In a nutshell, section 116 required that, upon a share sale, the purchaser must withhold 25% of the purchase price from non-resident shareholders until the shareholder obtained a clearance certificate from CRA, which could take many many months.

Special thanks to Steve Hnatiuk at Yaletown for his work via the CVCA for working so hard to get this issue resolved, who emailed me this:

The fact that US VCs would have to file clearance certificates for every single one of their underlying fund investors was a massive disclosure and administrative burden that significantly complicated distributing exit proceeds to the investors.  This was simply too big a deterrent and tax risk for many US venture investors to take on, and resulted in complicated and expensive structures often being put in place for Canadian deals as a work-around.  All of these things impaired the ability of Canadian companies to access venture capital from the US.

And, I will quote Keith Spencer from Fasken who put it simply:

Practically speaking, US vc’s can now invest directly in Canadian technology companies, pay no tax in Canada on their gains, and not be subject to any filing or withholding requirements. We’re open for business baby!

This is a great step toward helping capital flow across the boarder in both directions. Since, The more deals that are done by US VCs in Canada, the more deals Canadian VCs are invited to participate in south of the boarder. The circle life is complete.

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