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Ontario Premier Dalton McGuinty says his party will offer a 35-per-cent tax credit for those investing in startups. REUTERS/Brett Gundlock (REUTERS)
Ontario Premier Dalton McGuinty says his party will offer a 35-per-cent tax credit for those investing in startups. REUTERS/Brett Gundlock (REUTERS)

Incentives

Ontario Liberals pledge startup tax credit Add to ...

Ontario’s Liberal party, which is fighting for re-election, is offering a new sweetener for investors who put their money into startups.

With a provincial election just four weeks away, the governing Liberals have served up an election platform that includes tax credits for angel investors and big-name institutions who put money into the province’s smaller firms. The details are still being hashed out, but the tax credit could be worth 35 per cent of venture capital investment, which means that for every $100 invested, the angel investor or institution would get $35 back.

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Sectors eligible for this tax credit include technology, media, telecom, clean tech and life sciences, and companies who hope to offer their investors this tax break would have to be pre-approved by the government.

The government intervention comes in response to complaints from Canadian startups that they have had difficulty raising money. The problem has been particularly troubling in Ontario because policy makers are trying to build an innovative and diversified economy that is less reliant on manufacturing.

During the financial crisis, many in the venture capital industry hoped the sector would pick up as the recovery took hold. It never did. Given the dearth of funding, calls for governments to offer some sort of incentives have started to reverberate through business circles.

“I was extremely impressed that the government has finally stepped in,” said John Ruffolo, the head of OMERS’ venture capital arm. Mr. Ruffolo said the private sector has been scared to invest in venture capital after getting hit so badly during the tech bubble a decade ago, which made the government the remaining entity capable of bringing these players back to the table.

Ted Anderson, managing general partner of venture capital firm Ventures West, said nudging private players to put their money into startups is important for the Canadian economy. Canada’s skilled workers will have fewer opportunities here if startups fizzle out, and tech industry darlings such as Research In Motion Ltd. and Open Text would have never gotten off the ground without early financial backers.

Not only is government intervention being praised by the venture capital community, but the tax credits have been applauded because they allow the private sector to invest freely. “The public sector is not picking what I would call ‘the winners,’” under this plan, said Andrew Wilkes, co-chair of the National Angel Capital Organization. The investments are decided by “the people investing with their own money.”

“Over the past 10 years, the financing ecosystem has been broken,” Mr. Ruffolo said. The numbers support his claim. In 2000, $5.9-billion was invested in 1,007 Canadian startups, according to Thomson Reuters. Last year, just $1.1-billion was raised by 357 Canadian firms.

The Liberals stepped in to create the Ontario Venture Capital Fund in 2006, putting up $90-million of the provincial government’s money to attract another $115-million from institutions such as Manulife Financial. But it wasn’t enough, so Ontario looked to British Columbia, which has a successful tax credit for so-called “angel investors” – investors, often wealthy individuals, who invest in very-early-stage companies.

Still, Ontarians remain skeptical of government intervention after the failure of labour-sponsored investment funds. These vehicles were set up in the late 1990s to encourage retail investors to invest in startups by offering them tax credits. Yet the funds were flawed. For starters, commission were paid to stock brokers who found investors to put money into the fund, so that immediately reduced the amount of money invested. On top of that, the investors had no say in where their money was invested, or how quickly it was put into startups. Some of the money took a long time to be deployed.

Because the fund wasn’t successful, the Ontario government phased out tax credits for any new contributions. Now that the province has come back to the table with a different model to tackle the same problem, Mr. Anderson hopes it will build confidence around venture capital.

“If we can prime the pump for a while, then we can take away the incentives because they won’t needed,” he said.

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