Canadian Budget Implications For U.S./Foreign VCs

On March 19, 2007, Canada’s minority Conservative government announced the 2007 Budget, which includes a number of tax measures intended to give technology companies that are incorporated in Canada greater access to international sources of capital.

Canadian founders of technology start-ups face a difficult choice when deciding whether to incorporate in Canada or the United States. On the one hand, there are numerous tax advantages associated with carrying on business as a Canadian-controlled private corporation (CCPC), which can only be incorporated in Canada. For example, CCPCs are eligible for lower tax rates on certain income; CCPCs are eligible to receive investment tax credits (ITCs) for scientific research and experimental development (SRED) at a favourable rate and on a refundable basis; Canadian founders may be able to take advantage of the lifetime capital gains exemption on the sale of shares of a CCPC (increased in the Budget from $500,000 to $750,000); and certain tax