Following March 4th Canadian federal Budget, Deloite released a comprehensive summary (Link to full release) of the impact of the changes to the Taxable Canadian Property better knowned as Section 116, which is outlined below.

The CVCA Applauds Budget Decision to Remove Foreign Investment Barrier (CVCA release Link).

“The CVCA has long requested the elimination of Section 116 as it pertains to the venture capital and private equity industry and we wish to congratulate the federal government for taking action,” said Gregory Smith, President of the CVCA. “Many CVCA members, as well as a large number of individuals and organizations, have been actively encouraging the federal government to eliminate this section of the Income Tax Act which has had a dampening effect on cross-border venture capital and private equity transactions. Its removal provides an important signal to foreign investors that Canada welcomes their contributions to growing companies and employment.”

Note that there were also a number of highlight’s from the Canadian government’s Throne Speech and Budget that may have a direct impact on the technology landscape of Canada. TechVibes did a good job of summarizing the main Tech elements (Link to blog here)

Deloitte. SUMMARY

Government removes tax barriers and stimulates flow of capital across Canadian border

Canadian companies across the country are likely applauding today’s federal budget, which contains tax law changes that give them the advantage they need to compete on the global stage.

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. This change puts Canada at the top of the list of places to invest globally.

“The changes in tax legislation announced in today’s budget are among the most significant changes to capital gains taxation since the introduction of taxation of capital gains in 1972,” explains John Ruffolo, Global Tax Technology, Media & Telecommunications Leader, Deloitte. “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 our borders.”

“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,” explains Terry Matthews, Chairman, Wesley Clover. “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.”

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.”

BACKGROUND INFORMATION ON THE SECTION 116 TAX BARRIERS

The following describes the tax barriers that were removed in today’s budget and that are no longer preventing international investment in Canada:

• Withholding and Section 116 certificate process — The overwhelming majority of foreign VCs are not subject to Canadian tax when they sell an investment, but face a delay of many months to work through the Section 116 tax clearance process until funds can freely flow to them. Many foreign VCs are structured such that each of the investors in the VC — sometimes hundreds or even thousands — is subject to this clearance process as if they held the investment directly. This delay results in lower returns and frequently causes direct financial loss to investors. Canadians who invest in the United States, the United Kingdom and other major global markets do not face such taxes or delays from red tape.
• Requirement to file Canadian tax returns by foreigners who don’t owe taxes creates hundreds of pages of unnecessary paperwork — Canada imposed tax filing requirements in circumstances where no taxes were payable by these investors. When a foreign VC sells an investment, each investor of the foreign VC has to file a Canadian tax return even if they don’t owe any taxes. This results in literally hundreds of pages of documents that are required for signature and processing for a single sale. This tax return filing issue also applies to certain Canadian public companies.

Why Canada was perceived by VCs as having an unfavourable tax environment

A 2007 survey by Deloitte and Canada’s Venture Capital & Private Equity Association (CVCA) of 528 VCs from around the world found that 40% of U.S. respondents and 28% of global respondents cited Canada’s unfavourable tax environment as a key reason for not investing in Canadian companies. This level of concern is five times higher than for any other country in the survey and reflects the current investment crisis within Canada’s venture capital industry. The survey also found that Canada is attracting the attention of just 11% of U.S. VCs as a primary country for expansion — behind China (34%) and India (24%).

Please find the full release by Deloitte Here. EAVB_THMQKZAOUO

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Re-post by Jevon MacDonald for StartupNorth

I first met John Stokes a few years ago when he landed on to the Canadian startup scene and started talking about his new fund Montreal Start-up. In March 2008 they raised a small initial fund which they quickly deployed in to some nice deals in Montreal including Status.net and Whatsnexx.

John and the team, which includes Austin Hill, announced today that they will be taking commitments from the Quebec Government (through Investissement Quebec) at $50 milion, Solidarity Fund QFL, which is investing $33 million, and by FIER Partners, which plans to invest $17 million.

The fund still needs to raise over $8million directly from LPs, which Investissement Quebec seems to think will be a snap and done in 4 months, but I am not so sure. I hope I am proven wrong.

In case any potential LPs are reading this right now, here is my advice: Do this one. Do it because this team is going to do more than just pass the time humming over deals — you will get hustle, an aggressive attitude and a group that understands that Canada needs more hustle and less of the same old.

John and the team are connected and tuned in to the community. Early stage entrepreneurs trust this team and they are the kind of guys who can get your money in to some great opportunities.

Congrats and good luck.

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Re-post by Mark McQueen for the Wellington Financial Blog

March 3rd, 2010

Today’s Throne Speech contained a passage that will excite our friends John Ruffolo, of Deloitte, Stephen Hurwitz, of law firm Choate in Boston and Yaletown’s Steve Hnatiuk (Chair of the CVCA Tax Policy Committee). For several years, these three, along with the help of countless others in the venture capital industry, have tried to help the Federal Government understand that Section 116 of the Tax Act served as an unnecessary barrier to foreign investment.

In a nutshell, Section 116 required the limited partners of U.S.-based venture capital funds to make individual tax filings with Canadian tax authorities when a Canadian VC investment was sold, even though there would be no tax to pay as a result of bilateral tax treaties. To some, this was such a hassle that certain VC firms wouldn’t look to invest in Canada as a result.

The CVCA has long lobbied to have this dealt with, as one facet in our broad Commercializtion Support Program.

In yesterday’s Throne Speech, this reference caught everyone’s attention:

Our Government will open Canada’s doors further to venture capital and to foreign investment in key sectors, including the satellite and telecommunications industries, giving Canadian firms access to the funds and expertise they need.

Continued on the Wellington blog (Link here)

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Re-Post by David Crow for StartupNorth

Mantella Venture Partners launched today.It’s a $20MM early stage technology fund based in Toronto.

“Unlike most venture funds that are supported by institutional investors, this one is backed by Mantella Corporation, a family owned commercial and residential real estate developer who has been entrenched in the GTA market since 1946. The fund is also focused on the concept of ‘hands-on capital’, ensuring that early-stage entrepreneurs get the hands-on support they need at every stage of a company’s creation and growth to help facilitate”

The main investment partners are Robin Axon and Duncan Hill. Robin is ex-Ventures West and Ducan was an EiR at Ventures West and previously had founded Think Dynamics (acquired by IBM back in 2003). They also run Basecamp Partners/Labs where they have been incubating PushLife, Chango and a couple of other startups.

It’s interesting to see an emerging breed of Canadian incubators and small funds like Mantella VP, Extreme VP/Xtreme Labs, Bootup Labs, Flow Ventures, Montreal Startup, Wesley Clover, and others. All of these have very different models and motivations. But they exhibit the need many startups have in both getting to Product/Market Fit and then the business development and go-to-market efforts. Both of these efforts require capital, and it’s great to see VCs that traditionally don’t get their hands dirty with operational details down in the weeds.

Full press release below.

TORONTO—March 2, 2010—Mantella Venture Partners announced today the formation and launch of a $20M investment fund to support early stage technology ventures in Ontario. Mantella Venture Partners is a collaboration between Basecamp Labs, a private early stage technology accelerator, and Mantella Corporation, an established family-owned commercial and residential real estate developer in the Greater Toronto Area.

Mantella Venture Partners will invest in entrepreneurs who are building early stage mobile and Internet software companies, helping them to get their ideas from conception to market. Through the Basecamp Labs accelerator, Mantella Venture Partners will provide hands-on support at every stage of a company’s creation and growth – from business development and marketing to financing and team development – to help facilitate early market traction.

Mantella Venture Partners is managed by Robin Axon and Duncan Hill, the founding partners of Basecamp Labs, experienced venture investors and company creators who have been involved in multiple successful venture exits to companies like IBM, Intel, Microsoft and Siemens.

“For the past few years, we’ve seen a steady decline in Canadian venture capital deal flow, the number of VC-backed firms, and the average investment size,” says Axon.  “In fact, according to a recent CVCA report on the industry, investment levels in 2009 were the lowest they’ve been in 13 years.”

“But innovation is still thriving,” says Hill. “With the venture market in such a state of flux, the timing could not be better for the launch of a new fund that is focused on both early-stage investing and providing the hands-on support entrepreneurs need to ensure market success.”

The existing Basecamp Labs portfolio includes two companies: Chango, an ad buying platform for direct response advertisers; and Pushlife, a mobile entertainment platform for mobile operators.

“The value of combining capital with guidance and support from a team with extensive experience building companies, can be seen in the progress of our first portfolio companies,” says Robert Mantella, president and CEO of Mantella Corporation. “Robin and Duncan are experienced investors and entrepreneurs who are passionate about technology and know what it takes for a start-up to succeed. Together we can breathe new life into a changing venture industry.”

Duncan Hill was the Founder and Chief Technology Officer of Think Dynamics, a developer of data centre automation software that was acquired by IBM in May 2003. He spent two years at IBM driving strategy for early enterprise cloud computing. Most recently, Hill served as Entrepreneur in Residence at Ventures West; was an independent director for RapidMind (acq. by Intel August ’09); and was executive advisor to Opalis (acq. by Microsoft December ’09). He currently serves on the Chango board of directors and on executive advisory boards at Pushlife, ServiceMesh, Cirba, Embotics, and the Velocity program at the University of Waterloo.

Prior to founding Basecamp Labs with Duncan Hill, Robin Axon was a partner at Ventures West on the IT and communications team. Before that, Axon was at MD Robotics (formerly Spar Aerospace) and the Canadian Space Agency, where he helped to prepare the Canadarm2 for installation onto the International Space Station. Axon has served on the boards of a number of technology companies including: QuickPlay Media, RapidMind (acq. by Intel August ’09), AudienceView, Fortiva (acq. by Proofpoint ‘08), Chantry Networks (acq. by Seimens ‘03), Belair Networks and Instrumar.

About Mantella Venture Partners
Mantella Venture Partners is a $20M early stage investment fund with a hands-on approach to building technology companies in high growth markets.  The fund invests in founders focused on creating market-altering mobile and Internet software businesses, and surrounds them with an ecosystem of passionate, experienced operators that drive early market engagement into sustainable business success. Mantella Venture Partners will invest up to $500k at inception with the ability to support subsequent rounds as required. It is managed by Robin Axon and Duncan Hill, experienced venture investors and company creators who’ve been involved in multiple successful venture exits to companies like IBM, Intel, Microsoft and Siemens. Additional information is available at http://mantellavp.com/.

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Re-posted from Suzanne Dingwall Williams blog at Venture Law Lines

A consistent theme in Canadian innovation policy is the need to attract more foreign venture capital to underwrite our local start-ups. This is based on the theory that there is lots of venture capital willing and able to deploy cash north of the border. It’s a relativistic theory that is deeply flawed, and as yesterday’s Wall Street Journal hinted, one that becoming more foolhardy for the Canadian government to rely upon.

One of the largest sources of funds for VCs and Private equity players in the US ahs been CALPERS, the largest public pension fund in the United States. CALPERS manages more than $200 billion or so in assets and is reponsible for generating returns that will fund the pension payments to be made to retired California public employees.

In order to generate enough cash to meet these pension obligations, CALPERS typically targets investment that will generate an annual average of 7.75% return on its investments. Generating that rate of return consistently has led CALPERS over the last 15 years or so to make high-risk, high-yield investments in private equity and venture capital funds. As a result, CALPERS has become one of the largest sources of fuel for the North American venture capital industry, providing more than $25 billion to those fund managers our governmetns hope to attract up here.

However, it now appears that this fuel source may be tapping out. Last year, CALPERS announced that it was reducing the number of funds that it invested in. And yesterday, CALPERS revealed its proposal to reduce the targeted return on new investments to 6%.

If adopted, this target reduction would allow CALPERS to focus on more traditional, conservative investments – in other words, away from the venture capital funds that Ontario and the federal government are seeking to attract.

This week’s federal budget will be an opportunity to assess how self aware Canada’s Government is about what will (or can) feed investment in our innovation economy. Will the budget provide the means for local growth? Or will it dangle bait over a drying up river bed?

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Re-posted from Suzanne Dingwall Williams blog at Venture Law Lines

Just before Christmas I was out to dinner with a group that included Q1 Capital’s Mike Middleton, some US VCs and Vancouver’s Paul Lee. Paul was originally part of Distinctive Software, a Canadian game developer purchased by Electronic Arts. He stayed with EA for more than 10 years post-acquisition, rising to President of EA Studios before leaving to form Vanedge which, he explained to me, was going to be a new investment vehicle that he and his friends put together to invest in early stage digital media plays.

As it turns out, Paul has quite a few friends. PE Hub reports today that Vanedge is about to close the first $100 million in commitments from partners that reportedly include EA, BDC and EDC. I am wishing I’d put my wine on his tab. Interactive folks – this is the team to get to know.

More later.

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Re-post: Mark McQueen and the Wellington Financial Blog of 12 January 2010

Good news abounds for the Canadian private equity industry.

Just last week, Onex just closed on a new US$4.3 billion fund, called Onex Partners III, of which US$3.5 billion came from third party institutional investors. That US$3.5 billion is 75% more than had been raised for Onex II. According to CPP Investment Board’s website, it committed US$400 million to Onex Partners III in 2008; this commitment is more than double their US$150MM stake in 2003-vintage Onex Partners I.

CPPIB’s 2003 vintage investment in Onex I earned a 124.7% return on the capital invested (see prior post “CPPIB Canadian general partner Q2 2009 performance numbers” Nov 14-09).

Oncap, the small and mid-sized buyout arm of Onex, has also come through the recession with flying colours. $575 million Oncap II has been prudent about capital deployment during private equity’s “Golden Era”, and still has plenty of dry powder to invest. In a lower-valuation environment, having a chequebook is everything. Particularly when many U.S.-based PE funds are marketing their own new funds, and likely out of the market for new deals.

Birch Hill Private Equity Partners had a fabulous first close of $425 million in November. Considering the state of the pension fund universe and the negative impact that the drop in the public equity markets has had on the allocations that pensions have to “alternative assets”, this $425 million number is blockbuster. The fundraising target is $850 million in total. Their Sleep Country and Shred-It investments stick out as recent successes.

Clairvest Group Inc. had a $200 million first close on Clairvest Equity Partners IV, with one Ontario-based pension fund subscribing for $100 million at the outset. The balance of the $200 million comes from Clairvest’s own public company cash, a majority of which is owned by the management team and board of directors. Given their success with back-to-back PE “Deals of the Year” (see prior post “Clairvest makes it back-to-back “Deal of the Year” awards” Sept 23-09), you can be sure that $200 million figure will grow larger with subsequent closings in 2010. CPPIB’s $50 million commitment to 2001-vintage Clairvest EP Igrew by 51% in value as of the last reported quarter.

For its part, Torquest Partners has been busy closing new investments and financing tuckunders for portfolio company FirstOnSite. They even recruited the well-respected and popular Michael Hollend away from the excitement of the venture capital industry; Michael officially became a merchant banker in December. Every time I take my Nikon D300 on the road, I take a piece of Torquest with me via their Lowepro investment.

Canada’s private equity industry is definitely on a roll.

MRM
(disclosure – CVG is a partner in Wellington Financial and an LP in our fund)

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