Last week, Canada’s federal budget struck down a rule that  required  foreign investors to pay a 25 percent tax on any capital gains made when a Canadian investment was sold, unless the investor filled out paperwork to receive an exemption.  This is good news for potential venture investors in Canadian companies who have previously shied away from doing such deals because of administrative and tax hurdles.

The Canadian Venture and Private Equity Association applauded this change and stated the following in a press release:  

“The CVCA has long requested the elimination of Section 116 as it pertains to the venture capital and private equity industry and we wish to congratulate the federal government for taking action,” said Gregory Smith, President of the CVCA. “Many CVCA members, as well as a large number of individuals and organizations, have been actively encouraging the federal government to eliminate this section of the Income Tax Act which has had a dampening effect on cross-border venture capital and private equity transactions. Its removal provides an important signal to foreign investors that Canada welcomes their contributions to growing companies and employment.”

In the 2007 Global Venture Capital Study, conducted by Deloitte and the NVCA, 40% of U.S. venture capital investors cited Canada as the country with the most unfavorable tax environment.  The study was used to demonstrate the negative impact of the tax treatment to Canadian officials.

Click here to view CVCA’s press release on this issue.