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2008 Canadian budget a boon for entrepreneurs

Gues Blogger 2

By Peter Kemball

In its 2008 budget released last week, Canada’s Conservative government proposed beneficial changes for entrepreneurs, angel investors and venture capitalists seeking to create wealth by building businesses from the foundations upward.

When laying the foundations of a business, Canada’s Scientific Research and Experimental Development Program (SR&ED) tax refunds earned by early-stage technology firms are a vital source of cash. By allowing for 10% of all wages and salaries paid to Canadian residents for work performed outside Canada to be claimed, Budget 2008 will help improve cash flow. This change eliminates the ludicrous anti-marketing result of not allowing those expenses when experimental development work is conducted on export customer premises.

Budget 2008 also raised the limit of qualified expenditures for Canadian-controlled private corporations from $2 million to $3 million. However, the budget continued the anti-growth-rate policy of reducing the qualified expenditures amount for companies with taxable income of $400,000 or more, and phasing it out for those with taxable income of $700,000 or more.

Another addition to Budget 2008 was the introduction of tax-free savings accounts (TFSA). In brief, starting next calendar year, individuals can contribute up to $5,000 annually from after-tax income to a TFSA. Funds can be withdrawn, tax-free, at any time, positioning this new savings vehicle at the opposite end of the spectrum from registered retirement savings plans. The latter lets money to be put aside to invest before taxes are paid but requires taxes to be paid upon withdrawing funds.

This new initiative has potentially eliminated the capital gains tax for entrepreneurs and angel investors. Was introduction of the TFSA brilliantly accidental, or a sound implementation in support of the role assigned to entrepreneurs in the government’s science and technology strategy? Used in this way amongst other possible purposes, it would put the returns from investing in early-stage ventures on the same footing as winning the lottery. As a U.S. ambassador once observed, a country that valued entrepreneurship would not tax capital gains while leaving lottery winnings tax-free. Introduction of the TFSA meets the National Angel Organization’s request for support, albeit in a way akin to the relationship between the RRSP and the TFSA.

Finally, Budget 2008 appeared to remove a long-standing barrier to investment in Canada by U.S. venture capitalists, the infamous Sec 116 requirement that each investor provide Canada Revenue Agency a certificate that taxes are not due. This effectively prevented them from being rewarded for success and beating the odds against creating significant wealth.

What could Budget 2008 have done to really reinforce its hidden subtext of rewarding entrepreneurial success? You be the judge. Go to http://www.fin.gc.ca/activty/consult/sred_e.html where submissions provided to the consultation on the SR&ED Program before November 30, 2007 are being posted. When the government meets its commitment to posting all public submissions, review them and decide for yourself whether or not the SR & ED changes are a big “Eh” or a D. Given the Tory promises in respect of the capital gains tax, would an accountability review grade the budget as an Eh!+, a gentlemen’s C, or a D from the perspective of supporting implementation of the commercialization goals of the S&T policy?

Of course all of this would not be necessary if we were to enact the Tax Lawyers, Accountants and Economists Unemployment Act. Its key provisions would be a 15% tax rate on income, coupled with a capital gains exemption on a continuously declining daily basis, reaching zero at the end of a decade. Then the only questions for debate would be the amount of the basic exemption and the GST percentage. This won’t work, of course, except it is already available in competing countries.

Peter Kemball is CEO and founder at Acorn Partners, an innovative firm that helps B2B SMEs finance their success.

Time for an SR&ED tune up

Gues Blogger 2

By Peter Kemball

For a quarter of a century, the Canadian government has operated a popular program that puts cash in the pockets of innovative firms and reduces taxes for others, the Scientific Research and Experimental Development program, popularly called “SHRED.” It’s now time for a tune-up and recently the feds invited submissions from any and all interested parties on how to improve the program.

For this they deserve praise, do they not? Well, yes and no.

Yes, if they are fortunate enough to receive thoughtful commentary and perhaps even innovative suggestions to make the product of greater value to customers, small innovative firms. No, if their follow though is inept. Expectations have been raised that suggestions will come to the attention of open minds. Now that we’re past the submission deadline of November 30, how are officials and politicians going to demonstrate respect for the time and effort invested by those submitting commentary? One step they can take is to post to a web site the submissions for which they received permission to do so. Here speed is of great value and a week or two after receipt, the postings should be up for all to review. Better yet, the comments of those officials reading the submissions should be publicly posted to seek further feedback.

We at Acorn Partners submitted our thoughts to the review process and in subsequent posts, I’ll share some of our thinking with you.

Peter Kemball is CEO and founder at Acorn Partners, an innovative firm that helps B2B SMEs finance their success.

Tough decisions

Gues Blogger 2

By Peter Kemball

If you think your business requires tough decisions, you would agree that they are trivial compared to the late President John Kennedy’s during the 13 days of the Cuban missile crises. The world teetered on the balance of massive nuclear explosions and a wrong decision would have killed millions of people in Canada, the USSR and the United States. Nor was this the only time. On at least two occasions, military officers faced the apparent prospect of incoming missiles. For them the decision to retaliate or not had to be made in minutes. In one case, the officer wondered why there were only five US missiles on his radar screen. The answer was that he was looking at five birds!

Recently Ted Sorenson, a key advisor to Kennedy during the missile crises, set out his view on how a leader makes tough decisions in the face of conflicting advice. Speaking in Ottawa and Toronto a week or so ago, Sorensen advised executives to picture their options creatively. For example, Kennedy didn’t call it a “blockade,” which would have meant that any ship sailing towards Cuba would have been turned back. He labelled it a “weapons embargo,” thus allowing key non-military supplies to reach Cuba and make it clear to the world that Cuba was not the enemy. A nice byproduct was avoiding the alienation of people elsewhere in the Caribbean whose lives would have been disrupted by a blockade’s automatic triggering of wartime marine insurance rates. Reach out for support, Sorenson advises. Kennedy sought cooperation from all nations. And communicate directly with your opponent rather than through agents.

Above all, Kennedy was a realist. When the crisis had passed, an aide urged him to use his status to intervene in the Sino-Indian War. “But you are 10 feet tall,” the aide said. “Oh, that will last a couple of weeks,” Kennedy replied.

Technology executives may face just as much uncertainty as Kennedy did, and need to apply the same creativity to their problem solving.

Peter Kemball is CEO and founder at Acorn Partners, an innovative firm that helps B2B SMEs finance their success.

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