The National Angel Capital Organization (NACO) is pushing the federal government to instate a new tax credit intended to incentivize angel investing in Canadian early-stage companies.
NACO has led a lobbying effort since March to create a tax credit of 30 to 50 percent for angel investments in Canadian corporations or investment funds. Although this is not the first time NACO has asked for such an incentive, the organization told BetaKit it is hopeful the throne speech on Wednesday will mention it.
“A national equity tax credit is an urgently needed risk correction mechanism to encourage investment into entrepreneurs.”
“With the impact of the COVID-19 pandemic, the need for such a mechanism has become much more urgent and we are hopeful that this week’s throne speech will include a signal of support for the early-stage entrepreneurial ecosystem in regards to access to capital such as an equity tax credit or similar initiative that will directly benefit Canada’s early-stage entrepreneurs,” Amanda Filipe, director of the National Initiative for Women Entrepreneurs at NACO, told BetaKit.
According to April data from Startup Genome, nearly three in four startups reported a revenue drop over the first few months of COVID-19, with the average startup reporting a decline of 32 percent. NACO argued that because early-stage companies take on more risk than established companies, they are particularly vulnerable during the pandemic and economic uncertainty.
In April, BetaKit was first to report that the Business Development Bank of Canada (BDC) was exploring investment matching efforts to include angel investors and angel-backed startups that had been affected by COVID-19. According to sources, the crown corporation was in talks with organizations like NACO on expanding BDC’s Bridge Financing Program to angel investors. however, it would appear that no official expansion materialized from the talks.
In a recent statement sent to BetaKit, NACO said although organizations like BDC are providing much-needed capital to scaling companies, earlier stage startups are often not a fit for those programs or other growth financing options, such as venture debt.
“Angels are in the unfortunate position of having to lock up their savings for over a decade when they invest in entrepreneurial companies,” Claudio Rojas, CEO of NACO, said. “A national equity tax credit is an urgently needed risk correction mechanism to encourage investment into entrepreneurs in every community across the country, mobilizing local capital to create local jobs.”
NACO estimates a national equity-tax credit will mobilize nearly $15 billion in investment towards Canada’s entrepreneurs. The organization based the figure on 2018 data indicating there are over 10,000 ultra-high net worth individuals in Canada, with more than $30 million USD in net worth, totalling $1.05 trillion in assets.
As a result of #COVID19, Angel investment needs to increase across Cda. As said by @NACOCanada’s Amanda Filipe: “we’ve all heard the term, ‘It’s who you know,’ and we have to move away from that to, ‘It’s what you know.'” Angel groups help that to happen. https://t.co/wX6A9V9YSg
— Senator Colin Deacon (@colindeacon) September 16, 2020
Since March, the angel organization has hosted a series of virtual roundtable discussions with leaders from across the innovation ecosystem including elected officials such as Minister of Economic Development and Official Languages Mélanie Joly and Minister of Innovation, Science and Economic Development Navdeep Bains. Filipe, who joined NACO in May, told BetaKit the need for an equity tax credit has been part of these discussions.
There are already early signs of support for such an initiative. Colin Deacon, a Canadian senator, has expressed that because of the pandemic, there is a need to increase angel investing in Canada.
Other countries that offer tax incentives to angel investors include the United Kingdom through its Enterprise Investment Scheme and Seed Enterprise Investment Scheme, which provide 30 percent tax relief on investments in qualifying businesses as well as a range of other tax breaks.
Image courtesy NACO.