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The Sigh of Relief
A bi-weekly column with timely, relevant and possibly irreverent insight into the BC technology industry.

Something Ventured:
March 3rd 2000


By Brent Holliday

"Here we are, now where are we?
It's like nothing I've ever seen...
I didn't think I'd like it here at all,
But I swear, I swear I'm on the verge."
ñ Tragically Hip On The Verge

Is this where you want to live?  Is this where you want to build a technology company?  Two very different questions.  Events of the past week have helped push both towards ìYesî.  Taber, Alberta and Ecole Polytechnique notwithstanding, Canada is not a place where six year olds can shoot other six year olds.  In any discussion and ranting that follows, please keep that in mind.

In the most positive budget that I can remember, an awful lot of good things are FINALLY happening in federal policy.  But, is it too little too late?  Whatís the real impact on you and on BCís tech industry?

First the important numbers (using a fictional technology company) and how the budget affects them and their employees:

  • Now an engineer anywhere in Canada making a respectable $55,000 a year salary will pay 5% less in tax ($2,750 more bucks in their pocket a year), thanks to the middle tax rate drop and the indexation keeping away the bracket creep.  Good.

 

  • Assume the VP, Business Development is paid an employment income of $80,000 a year.   In the top bracket, they pay $41,008 in tax for the pleasure of living in BC.  Think of it as your contribution to the fast ferries and Skeena Cellulose.  In Alberta, the same VP will pay $34,968 in tax, putting $6,040 more in their home, children, debt payments or investments.  Did I mention no PST? 

 

  • If the company went public in 2000, the employees that exercise their stock options no longer have to sell immediately to pay the capital gains tax.  THEY LISTENED TO US!  Now the employee pays the tax only when they sell the shares for actual money.  What a concept! 

 

  • If the same employee from the public company sold $100,000 worth of stock and that was their entire capital gain (or if they made that much day trading on the companyís fast Net connection, while ignoring their actual jobs) for 2000, then the reduction of taxable capital gains from 75% to 66.6% means $2,700 extra.  This is a big step in the right direction, but a confusing one (more on that later).

 

  • If the same employee made the capital gains at their BC company, they paid $22,763 in tax on their $100K gain.  In Alberta, they paid $19,407, putting another $3,340 in their pants. (Note to self: Explain later why Alberta isnít booming in technology like BC is, even as we bend over for the NDP and take itÖ personally).

 

  • This is HUGE.  And of course, the traditional, non-tech Canadian media missed reporting on it.  I brought this up a few times in the past and it appears that someone else thought it was a good idea: They allowed tax rollover on investment in small business.  For you non-accountants, that means, just like in California, you can avoid paying the capital gains tax for a while by investing the gain in an early stage tech company.  Get it?  Our employee above can put all of their $100,000 as an angel investor into a CCPC (Canadian controlled private corporation) and pay no tax on it this year.  Assume that the company miraculously grows and sells for 5 times the value by the end of 2001.  Now the employee has $500,000 (all of it capital gain).  They can invest that in another companyÖ and still pay NO tax until that investment becomes liquid!  Eventually, the gains tax will be paid, but the incentive to have your money grow tax free by investing in early stage companies is huge.   The limit is $500,000 and the company cannot be worth more than $2.5M CDN before the investment.  So the angel investor is the only one to get the break.  All you seed stage companies take note.  Mike Volkerís Angel Forum will be much more popular from now on.

 

  • Our fictional technology company will pay a whopping 1% less in corporate tax, but not until 2001.  Wouldnít want to rush things.  Eventually, it will drop by six more percent, bringing us in line with 2000 US rates, in 2006!  Do they really think that the US will stand still on taxes with their surplus? Now, none of this affects too many Internet or biotechnology companies, because you have to make a profit to pay corporate taxÖ  If you do manage to eek a small profit (<$300,000 in 2001) then you immediately jump all the way down to 21%, the small business tax rate.  So, what they are saying is, donít make more than $300K for a few years until we let the corporate rate catch up.  Geniuses.

In a bit of a warning shot across the bow of IT and Internet companies, the budget strongly warned that they would be cracking down on the SR&ED credits for corporate R&D in software and Internet.  They claim that the magnitude of claims in these areas reflects a general misunderstanding of what research and development really is.

One other thing I liked about the budget was the doubling of maternity/paternity leave in Canada.  Give families another strong incentive to be here.  Any ex-pats in the US that have kids are thinking long and hard about where to have/raise them.  Might have another one myselfÖ you know, Year of the Dragon and all.

If I were making policy in this country and/or in this province, I would want to drive towards some utopian ideal, knowing that we would never get there, but giving a long-term goal nonetheless.  What Canada needs and what BC is screaming for is stimulative action.  Other nations have lapped us when it comes to economic innovation and realizing that a digital economy is a clean-burning, wealth creating one.  Australia has just moved to 24% capital gains tax (BCís is 34%).  Ireland has 10% corporate tax and special incentives for technology companies.  Even Sweden, land of the guaranteed personal assistant for everyone over the age of 65 (imagine that, your caddy/chauffer/therapist/cookÖ wow), has massively de-regulated industry, broken public service union domination and thrown money into venture capital funds to stimulate their well-educated workers to be more entrepreneurial.

The lack of reduction of capital gains tax is baffling. I applaud the lowering of the amount that is taxable, but my trusty spreadsheet tells me that you actually get the same amount of tax if you lower the capital gains rate on 75% of the gain to 30%.  Donít you get more political hay by saying ìI have reduced the capital gains tax by 4%î vs. ìI have reduced the inclusion rate for capital gains tax from 3/4 to 2/3.î  The first one seems more straightforward.  Back to my point: Nothing stimulates people more than winning the lottery.  Lately, investing in the stock market in Canada has been like winning the lottery.  Win the 6/49?  No income tax payable.  Zero.  Win with Ballard Power?  Give me roughly 27% of your money, pal.  Lots and lots of people play the lottery.  Get it?  Reduce capital gains and more and more people play the investment game. For technology, people with options make more.  Perhaps more than they would elsewhere.

Rob Ayer just became a $300,000,000aire yesterday when Onvia.com went public (see Random Thoughts below for more).  He used to tough it out at Axion Internet in Vancouver and went to the University of Waterloo.  Letís assume that the stock price holds until his lock-up ends in six months and that he sells a few thousand shares for a capital gain of $30,000,000 Canadian in 2000.  In BC, he pays $10,254,000 in tax.  In Alberta, he pays $8,742,000.  In Washington, where he now resides, he pays $7,800,000.  (In Bermuda, he pays $0,000,000)  By living in Seattle, instead of Vancouver, he has $2,454,000 extra to spend on his family and friends and acquaintances that write columns for T-Net (Just a golf game, Rob, thatís all I askÖ at Pebble Beach).  What does $2.4 M mean on $30 M?  Apparently quite a bit.  Thatís $2.4 M spent in the local economy, generating larger profits for local businesses, which then pay more tax.  Itís $2.4 M less that some pinheaded politician can spend on a fast ferry or a grant to create jobs.  Are you with me here?  Capital gains are much bigger these days than income.  Tech people get much more in options than in salary for overall compensation.  If itís a two hour drive for $2.4 M, then Iíll buy the gas.

Having griped about capital gains, I still find the budget to be positive.  I especially like the rollover rule to help make angel investing more attractive.  The playing field is not still tipping further away from level.  As I have mentioned before, taxes are not what makes a successful technology climate.  Itís one part.  Alberta is still behind BC in developing its tech scene, even though the tax advantages are large. (Q: How many senior Telus execs have condos in Calgary, have their spouses own their homes in Vancouver and claim to be Alberta residents for tax purposes?  A: Just about all of them).  We have great advantages in climate, universities, ski hills, NASDAQ 100 companies, more venture capital and more proximity to Seattle and the Valley.  Wouldnít it be nice to not have a jackass like Paul Ramsey saying he would re-distribute tax breaks?  Wouldnít you like a little more of your hard earned money?  Wouldnít you like to hear me complain less about it?  I thought so.

 

Random Thoughts ñ

  • Who Wants To Marry A Billionaire? ñ SWM. Runs a small Internet company.  Looking for lasting value in a relationship.  Must like hockey, beer and know how to spell Saskatchewan. Reply to: glenn@onvia.com  Of course, he has none of it yet, and his company has a negative gross margin (the stuff he sells costs more than the price that was paid) and lost a mere $48 M US last year.  But everybodyís happy after the stellar IPO on March 1st.  Nancy Schoendorf, the VC from Mohr, Davidow that invested the first $11M US last January, couldnít have said it better when she told me, ìWe love Canadian entrepreneurs.  Keep sending ëem down.î  Yeah, Nancy.  Thatís the problem. But letís not rain on Glennís parade for now.  Speaking of parades, a friend of mine who is very close to Glenn, received a call last night at 9:30 pm PST from a very drunk, very happy, very loud CEO in a limo, in Manhattan.  All expenses for the three limos and 30 odd people close to the company were paid by a very happy investment bank.  I think I would throw a party, too.   Wonder how the 8 am CNBC interview went this morning?

    I have one small dig to get in here.  Glenn stuck it out with the private equity/VC value route to success.  He did not get on the NASDAQ OTC-BB or American Exchange and try and raise money there.  He did not roll his e-commerce company into a mining shell.  Each type of financing leads to different levels of success.  If you want to be really, really big, or at least have the shot at it, there is a clear path to that success.  And it almost always involves VCs.
  • BC ESTI (Early Stage Technology Indicator) for March 3rd is 8.5 out of 10.  Back up to the all time high.  The budget did much more good than harm. The NDP and its new leader are painted in a corner, forcing them to actually listen if they want to get a vote or two in the next election.  The stock markets continue to roll.  Vancouver gets more attention with Onvia.com (albeit not all positive) and Worldwide Fiber going public soon.  A few local companies will raise significant capital in the first quarter of 2000.  All in all, a good time to be an entrepreneur.

  • Time To Toot The Horn ñ Greenstone came out with a bang Wednesday in the Globe and Mail.  We have been open for investments for a while now, but we thought that given all the announcements of VC funds in Toronto lately, we should remind folks across the country that BC has a vibrant tech scene and is desperately in need of some new VC faces.  We are involved in some very exciting young companies here in BC and look forward to helping them grow to be Onvia-sized companies someday.  Our extended network of contacts in Canada and down the coast in the US can tap our CEOs into captains of industry and top sources of future financing.  We developed these relationships by spreading the word about BC and Canada and showing them that we think and act very much like they do.  Learn more at http://www.GreenstoneVC.com


What Do You Think? Talk Back To Brent Holliday



Something Ventured
is a bi-weekly column designed to supplement the T-Net British Columbia web site with some timely, relevant and possibly irreverent insight into the industry. I hope to share some of the perspective and trends that I see in my role as a VC. The column is always followed by feedback (if its positive or constructive. I'll keep the flames to myself, thanks).

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