So far, the pandemic has had a devastating impact on Canada’s tech entrepreneurs.
Technology spending has decreased. Venture capital was never strong in Canada and is now more cautious than ever.
Small businesses have received good government support through the Emergency Wage Canada Subsidy, Emergency Business Canada Account, and the newly improved Emergency Rental Canada Subsidy, and countless businesses have been saved. Even so, every Canadian city has empty offices with tech entrepreneurs waiting for rent.
With the pandemic dwindling, surviving businesses have an opportunity to storm back, but raising money will still be a challenge. It’s time to introduce a popular funding incentive in the commodities sector known as flow-through stock. Applying this tool to the technology sector, Canada could generate nearly $ 1 billion in research and development in new technologies.
The flow-through stock is a special type of common stock that allows eligible companies to pass certain expenses on to the holders of such stock. Investors can choose to deduct these costs as a tax deduction instead of the company deducting them from profits.
The use of flow-through proportions has led to investments in Canada’s mining, oil & gas, and renewable energy sectors over the past half century. As Canada’s Prospectors and Developers Association put it, “Flow-through stocks have helped Canadian mining companies become world leaders. Vijay Jog of the University of Calgary’s School of Public Policy, in a survey, identified at least 1,783 companies that had raised funds through flow-through stocks issued between January 2008 and June 2014. These companies have closed $ 4 billion in funding, of which Flow – through shares contributed $ 2.5 billion – a sizable amount in all respects. This tool has given countless entrepreneurs access to capital for high risk projects while offsetting some of the risk for their investors. Imagine the huge benefits flow-through stocks could bring to Canada’s AI, blockchain and fintech companies.
Even before the pandemic, Canada ranked last among OECD countries in creating billion dollar businesses. Before the pandemic, the U.S. venture capital market was valued at $ 60 billion, while Canada only attracts $ 3 billion (Cdn.) Of this type of funding, less than half of what we get given the size of the U.S. American market could expect two economies.
To date, investments in startup tech companies have largely come from high net worth angel investors, venture capital pools, and private equity funds. Expanding flow-through stakes into the tech sector would not only give entrepreneurs access to a huge pool of funds, but also allow ordinary investors to partake of the returns (and yes, the risks) of an exciting investment opportunity.
The government has defied the idea, citing the loss of tax revenue and the potential for abuse, and they are rightly skeptical. It is one thing to explain an oil field well. But how can the government be sure that investments in software and programmers are valid? Additionally, memories of the early 2000s remain fresh when companies lined up to convert into income funds. Ottawa decided to shut down the income trust system, and tax officials understandably hesitate to go down a similar path again.
However, the solution to these problems can lie in new technologies themselves. For example, blockchain offers a means to avoid these unintended consequences. In simple terms, a blockchain is software that acts as a general ledger that is distributed across nodes of a communication network. What sets it apart from traditional registers, shared databases, and accounting software is its immutability: no one can change, reverse, or delete these transactions without the consent of most nodes. Blockchain offers a transparent, yet encrypted, solution to the challenges of validating and securing technology investments.
Finance could set up a blockchain ledger and require companies to record, if not perform, all flow-through stock transactions there, including how they spent the money received. Everyone – shareholders, regulators, stock exchanges, the Canada Revenue Agency – can review and review the use of funds in real time. Can you think of a more trustworthy system?
Such a plan would not only ensure the effectiveness of the program and limit abuse, but also demonstrate the willingness of the Canadian government to adopt new technology. It’s a win-win situation: flow-through stocks would support research and development (and R&D jobs) in the technology sector during these troubled times, and Canada would pioneer a new funding platform that leverages the capabilities of the blockchain and promotes innovation.
At the Blockchain Research Institute, we estimate that this could translate into more than $ 800 million annually in new investments in Canadian technology and that short-term losses in tax revenues would be quickly offset by taxes paid by growing, successful tech companies.