For those of you unfamiliar with this well-discussed section of the Income Tax Act, Section 116 requires the limited partners of US-based venture capital funds to make individual tax filings with Canadian tax authorities when a Canadian VC investment is sold – even though there would be no tax to pay as a result of bilateral tax treaties.
McQueen was indeed right and the 2010 Budget delivered today (424 page PDF) by Finance Minister Jim Flaherty confirmed as much. Chapter 3.3 of the budget titled Improving the Regulatory System and Reducing Red Tape reads:
Budget 2010 also proposes measures to reduce the administrative burden of the tax and tariff system:
Section 116: Eliminating tax reporting under Section 116 of the Income Tax Act for investments such as those by non-resident venture capital funds in a typical Canadian high-technology firm.
Hopefully this piece of Canada’s Economic Action Plan is the first step in recovery for Canada’s Venture Capital industry that has been blaming the shortage of US venture capital funds in the Canadian market for years.