Sigh of Relief
bi-weekly column with timely,
relevant and possibly irreverent
insight into the BC technology
March 3rd 2000
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
Is this where you want to live?
Is this where you want to build a technology
very different questions.
Events of the past week have helped push both
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
First the important numbers (using
a fictional technology company) and how the budget
affects them and their employees:
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.
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?
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!
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).
the same employee made the capital gains at their BC
company, they paid $22,763 in tax on their $100K
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
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
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.
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
They can invest that in another companyÖ
and still pay NO tax until that investment becomes
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.
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.
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
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
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
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
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
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.
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
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
people get much more in options than in salary for
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
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.
Wants To Marry A Billionaire? ñ SWM. Runs a small
Looking for lasting value in a relationship.
Must like hockey, beer and know how to spell
Saskatchewan. Reply to: firstname.lastname@example.org
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
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
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
you want to be really, really big, or at least have
the shot at it, there is a clear path to that
it almost always involves VCs.
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
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
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
Something Ventured Archive
Online Venture Capital Guide