Canadian investing, eh?

Think you might want to foray into Canadian investment? You’re not alone.

According to the CVCA (Canada’s Venture Capital & Private Equity Association ) cross-border investment is increasingly trendy. Non-Canadian investors represent 33% of venture investment in Canadian firms, and foreign investment in Canada is up 67% (Q32006 over Q32005).

At our last AoA Membership Luncheon, Devin Stockfish of K&L Gates gave our group some quick tips on investing in Canadian companies (timely, as one of our presenters was in fact Vancouver, BC-based). While this serial entrepreneur CEO had good traction and a compelling technology (and, as he pointed out, Canadians are just so darn nice), Devin provided some additional reasons we might want to consider cross-border investment.

• The “shred” program (SR&ED, Scientific Research and Experimental Development), providing investment tax credits to provide incentives for conducting research in Canada

• IRAP (Industrial Research Assistance Program),provides business and technical services to growth-stage Canadian companies

However, he suggested investors consider the following nuances:

Canadian tax issues

• Differing treatment of dividends, interest and capital gains
• 116 clearance certificates , which become important with sale of shares
  
• US LLC treatment: treated as a corporation vs. a partnership

US tax issues

• Passive foreign investment company (PFIC) and Controlled Foreign Corporations (CFC):note special instructions from the IRS on taxation of profits

The take away was not to shy away cross-border investing, but to deal with these issues at the time of investment vs. at the liquidity event. The proper deal structure (and legal help) can prevent headaches. Other than that, when you visit the management team in Canada, remember your passport, and that it’s only an urban legend that Canadian beer is stronger.