2008 Canadian budget a boon for entrepreneurs

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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 Funds can be withdrawn, tax-free, at any time, positioning this new savings vehicle at the opposite end of the spectrum from registered retirement savings plans.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.

/// COMMENTS

3 Comments »
  • links for 2008-03-06 « National Angel Organization

    March 06, 2008 2:30 am

    [...] 2008 Canadian budget a boon for Entrepreneurs – Peter Kemball (tags: angel angels entrepreneur) [...]

  • Steve

    March 06, 2008 1:55 pm

    Peter,

    Please tell us more about how you see the TFSA effectively eliminating the capital gains tax for entrepreneurs and angel investors.

    Thanks

  • Peter Kemball

    March 10, 2008 11:59 am

    If shares in privately held firms were placed in a TFSA, they would appreciate in value tax free. This already can be done for RRSPs, just not by company principals. To be used for the purpose of encouraging founding entrepreneurs, the rules for TFSAs would have to differ from those which have been used for RRSPs.

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