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IPTC Overview
Why the IPTC is Necessary
Why the Capital Gains Tax Doesn’t Encourage Early-Stage Investment
Support the IPTC
Public Policy Reports
Innovation and Productivity Tax Credit (IPTC)
The National Angel Capital Organization is recommending that the Government of Canada and provincial governments adopt an Innovation and Productivity Tax Credit (IPTC) similar to the UK’s successful ten-year-old Enterprise Investment Scheme and B.C.’s Small Business Venture Capital Program. The IPTC would encourage Canadians to invest directly in start-up and early-stage companies as individuals or as Angel investors.
The IPTC would define eligible companies as meeting certain simple size and type criteria. Once a company was approved as being eligible and allocated a specific tax credit allotment, individual investors could invest up to that amount in the eligible company. Upon making their investments investors would apply for a 30% refundable tax credit. The tax credit would be funded 50/50 by the federal government and participating provinces.
The compelling reasons for the Innovation and Productivity Tax Credit are as follows:
- IPTC can be used to cut taxes while generating more tax revenue than it uses;
- It can generate great social returns through high quality job creation, regional development, product innovation, and reduced tax burden;
- It can create net new investment for economic growth;
- It increases the chances of success for start-up and early-stage companies by attracting more capital and individual investors;
- It mobilizes individual investors with expertise, skill, and contacts to help SME’s;
- It benefits high-growth and knowledge-based SME’s the most;
- It can be embraced by all members of the risk capital sector and many other sectors of the economy;
- It is not subject to abuse like the SRTC program in the 80’s;
- It is relatively simple and cost-effective to administer;
- It can be limited to a pre-determined budget amount by allocation;
- It can be used to improve federal/provincial relations and integrate with labour sponsored funds;
and
- It greatly increases availability of risk capital in rural areas, outside major financial centers.
Why the IPTC is Necessary:
For Canada to be successful in the highly competitive 21st Century global market, it must create a steady stream of innovative companies. New companies create new jobs in new fields. Unfortunately, many new businesses do not get off the ground, or fail too soon as a result of under funding. Sustainable Development Technology has estimated a $5 Billion funding gap is holding back the country’s economic development!
The most efficient way for government to encourage new businesses is by mobilizing Canada’s individual – or Angel investor – who brings ‘smart’ capital and increases the odds of the companies’ competitiveness. Angel investors are mostly successful serial entrepreneurs who have experience “picking winners” and developing strategic direction. Since the money they invest is personal, they have a vested interest guiding the companies to success.
In the United States, individual investors fund thirty to forty times as many entrepreneurial firms as the formal venture capital industry and invest three to five times more money. The Global Entrepreneurship Monitor (GEM) Canada 2002 study revealed that the United States has 53% more Angel investors per capita than Canada (4.9% vs. 3.2%). The study’s authors found this surprising given the fact that Canada fared well in every other indicator of entrepreneurial activity. The lack of individual investors is a critical bottleneck in Canada’s commercialization strategy.
The current markets for seed and early-stage funding are small, inefficient, and imperfect in Canada. Canadian Angel investors are best suited to the early-stage environment, but have underdeveloped mechanisms to assist in making these investments. Banks, venture capital firms, and the BDC are structurally impeded from properly servicing this market. There is a critical need for government intervention.
Why the Capital Gains Tax Doesn’t Encourage Early-Stage Investment:
Current government incentives for individuals to invest in early-stage companies are limited to capital gains tax. Since only a small number of early-stage companies make it to a liquidity event – and the timeframe usually exceeds 7 years, the capital gains tax benefit is significantly discounted by investors at the investment decision stage.
Generally, people are more concerned about losing their money, than they are excited about making more. In the absence of any special incentive they will therefore invest more conservatively in later stage and public companies, with limited benefit to the economy.
The advantage of a tax credit is that people have the incentive up front on the way into the investment rather than after the investment has run its course. The Innovation and Productivity Tax Credit would encourage earlier stage, higher-risk investments by many more individuals.
Support the IPTC
The NACO is gaining solid support for the IPTC from many business groups across Canada. However, we need senior politicians (provincial and federal) to hear how important a tax credit is to increase the rate of capital formation for early-stage companies in Canada. Whether you are an Angel or an entrepreneur, write a letter supporting the IPTC.
Ask relevant industry associates to support the IPTC. Sample letters can be downloaded below. Send the letter to your provincial policy makers and politicians. Send a copy of any letters to the NACO (1600-401 Bay Street, Toronto, ON M5H 2Y4) so that we can compile a book of support letters. Act now to make the Innovation and Productivity Tax Credit a reality!
Support for the IPTC
Sample Support Letter for Entrepreneurs
Sample Support Letter for Associations
Sample Support Letter for Angel Investors
Public Policy Reports
The following reports provide a thorough background on the IPTC initiatives and other similar and successful programs that have been implemented in other regions:
Inv't Tax Breaks in the US (inc.com - Sept. 05)
Solving the Precommercialization Gap
Canadian Conference Board: 6 Quick Hits
Overview of the IPTC Initiative
IPTC Seven Questions
IPTC Issues Checklist
Global Economic Monitor, 2004 Financing Report
NAO White Paper - IPTC
Industry Canada: Venture Capital 1996-2002
UK Tax Credit
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