EBC’s – Important Notice- Budget Update.

Written by on February 23, 2009 | Technology Startups

On Feb 12th, Rick Manifold from the BC Investment Capital Branch sent out word to all the EBC’s that until March 1, 2009 investors can get 2008 refundable tax credits for their investments in eligible BC businesses!   Eligible business owners are strambling to drum up some investments given this significant investor incentive but is it too late….

This should really be a no brainer investment if you can find the right eligilbe company to invest in… therein lies the problem.  

Here’s how the program works:

  1. Find an eligible  BC tech startup- (there should be a published list somewhere?) (or a fund like WUTIF or Bootup Labs VCC) and determine whether you can invest- friends & family exemption, accredited investor, Offering Memorandum, etc.
  2. Determine merits of the investment- how, when and how much money will you get back… this can be risky in which case you may want to look at Wutif or Bootuplabs which will diversify this risk and keep a sophisticated investor team evaluating the merits of the investments.  Both have very low management fee structures (will work on a comparison table for a future blog entry).
  3.  Pay for your investment ex. $10,000 (but consider doing it through your self-directed RRSP) for a kicker return.  If you had a good 2008 and were at the top tax bracket (example over 123k salary) this RRSP investment will yield a $4,370 tax refund.
  4.  Get your EBC/VCC tax credit which is a 30% refundable tax credit or a further $3,000 refund on a 10k investment.

So your net investment is $2,630 for a $10k investment… wow!

But it doesn’t stop there!  Eligible Tech startups are generally eligible because they are developing technologies that would qualify for the SR&ED corporate tax incentive program.   So let’s look at how that works in this example.

  1. The Company takes your $10k investment and pays programmers/engineers etc. to help develop the technology.  
  2.  The Company files a tax return and a claims for the Federal and BC SR&ED tax credit which can generate up to $6,847.50 (assuming Proxy space is available) of additional refundable tax credits to the Company.

Let’s recap- you spend a net out of pocket $2630 which provides your investee company $16,847.50 of cash to build technology that can be then marketed and sold generating a return on your investment!  

You will have to hold this investment for a minimum of 5 years but that is the typical length of time that would be needed to bring such technology to market anyway.    

Compare this to your $10k mutual fund RRSP investment in the last few years… LOL’s.

  1. $10k immediately followed by your broker’s trailer fee (1.5% per year) plus the Mutual Fund Management fee of 2.5-5% per year…. good start!
  2. They invest the money for you in public Companies that hire professional executive teams to run them.  They take off the top their salaries and incentive programs which have received much notariety over the last 12 months.
  3. At least you have the investment in a liquid market… but wait you’re holding this investment in an RRSP so no real benefit there…?

Morale of the story is more effort needs to go into helping communicate and generate investor awareness for these investment programs.   The public VCC’s which are good at this communication because they can leverage the investment brokerage community but this makes them more expensive to operate and they are investing in later stage businesses, often public companies which cannot capitalize fully on the SR&ED program for example.  

Programs like Bootup Labs and Wutif are helping solving this problem but the securities exemption limitations are precluding average investors from taking advantage of these programs which is very unfortunate.    Accredited investors please setup up.  

Two additional recommendations to open these incentives up to average investors, to help EBC’s get financing and to spread the risk include:

  1. Change the accredited investor rules such that normal investors can invest up to $10k per year without exemption requirements.
  2. Increase the number of shareholders to 100 before a company is deemed to be a “reporting issuer”

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Top 10 Tips for Bootstrapping a Tech Startup in Canada

Written by on September 11, 2008 | Technology Startups

  1. First and foremost be building technology that qualifies for SR&ED (Scientific Research & Experimental Development Credits”!  Let’s just say you’re building something that all you’re buddies with comparable technical backgrounds would be impressed with ie. “Peer test”  How this works is you do the qualifying work, pay the developers/scientists, file your corporate tax return (T2) and up to 6 months or so later (for first time filers), you get a cheque in the mail from CRA (Canada Revenue Agency) even though you may not have even generated any revenue yet… sweet!  Several caveats so see my Top 10 things you need to understand about SR&ED!
  2. All nice but you have to pay everyone first and wait 6 months after you file…need some working capital!? Well, given that you’re doing, or think you’re doing cool, qualifying tech- go hammer on the door of NRC-IRAP (National Research Council- Industrial Assistance Program).   If you get through their sniff tests you can get typically 50-75% of your developer/scientist salaries comp’d (employees get higher % so plan accordingly!!).  A cheque will come every month following the month after you incur the costs!  They audit you so get a good bookkeeping system going- we recommend QCDocs!  See top 10 things you need to know about NRC-IRAP Programs! 
  3. Okay now things are looking hopeful!  With NRC contract (actually NRC will want to see this first so timing needs to be perfect!) in hand go talk to Mom and Dad or your rich Uncle, also known as a Friends & Family round!  Treat them just like regular investors and you’ll go a long way! Now hopefully you’ve got enough cash to get a development program started!
  4. Now enroll for GST with quarterly filing!  While you’re losing money guess what- you get your GST back for everything you pay GST on- ie. Legal fees, cellphone, mileage, meals & entertainment (only 1/2 though!), office supplies, etc.)  File each quarter and get your cheque!
  5. Now you need some space- work from home!  (Note: rent is backed out of SR&ED proxy so getting swanky office in Yaletown not good for Bootstrapping!)  Alternatively find a good incubator- I recommend Bootup Labs for obvious reasons!  Danny, Boris and Jordan have it going on so try to squeeze on in!  SFU Time Centre is good as well across the street at downtown campus!  Part-timers use Workspace in gastown!
  6. If you work from your apartment where you’re paying rent/mortgage interest then apportion a reasonable amount of space out and get some of that rent, utilities, etc. deductible!  Some tricks here so see my top 10 Tax tip links
  7. Telephone- oh my dear god don’t get me started!  Get a cheap Rogers home phone plan with call forward! Get 1 or 2 cellphones and start the juggling act or better yet get skype and never leave your desk!  Whatever cell phone plan you do get call every 3-6 months to find out what discount they are offering that they don’t volunteer until you call…baaah!? 
  8. Health Benefits- MSP is what it is so no help there…pay your monthlies personally to minimize T4 taxable benefit pains at year end!  Hook up with www.vipmd.ca and get low cost insurance for risky stuff- ie. long term disability, AD&D, critical illness and life insurance ($12-$25/month) plus a Personal Health Spending Account (PHS) for $25-$50/month.  The PHS program is cool as it allows you to pay using after tax dollars for utilization items like prescription drugs, dental work, contact lenses and everything else covered by the tax act with no “deductibles and restrictions” often bundled with insurance packages.  You just go online, enroll, set your thresholds up for your employees and they just log in and submit their receipts and get reimbursed.  You’re company gets billed monthy and builds up a trust account that you can pull back into the company if you don’t use it all!  Sweet!
  9. Bookkeeping- Do it yourself using excel and a shoebox!  If you believe your time is better spent building your technology/core competency and you don’t want an outrageous year end tax bill that grinds your SR&ED refund then think twice!  Guess what, technology is fixing this problem too!   Shameless self promotion for our sister firm Tandem Accounting Group Ltd.  powered by QCDocs!  Point your mail to PO Box # and receive all your mail by “email” while simultaneously having all your bookkeeping requirements maintained in QuickBooks.  All your accounting, HR and legal docs are filed online for your ease of reference with a virtual A/P setup and maintained through your own QCDocs Portal! Each month you use QCDocs to manage your expense reporting using CSV uploads from your online credit cards where you put all your startup expenses so you can maximize your air miles or cash dividends!  Developers log their time in QCDocs timetracker to document time for NRC-IRAP and SR&ED compliance requirements.  The lovely and talented Tamara, Lindy and Gail take care of the rest spitting out your cheques/payroll when and where you need them and firing you investor ready financials each month.   Cash management Monday reports keep you bootstrapping along!  Negotiate partial pay in equity… the owner is a bit of an entrepreneur himself!
  10. Bank with Vancity or Coast Capital to minimize egregious bank charges  – see top 10 list of recommended banks.

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