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Tech in Canada. Peter Childs’ framework for stimulus.

In three postings I wrote last week, I laid out the problems facing the Canadian tech sector.  With a budget looming in Ottawa, the topic of economic stimulus for the tech sector has been raised by various individuals. In Can we do more than play hockey? I outlined the funding gap that exists for Canadian startups as home grown VC’s are failing.  Losing our ability to innovate enlarged on this theme as it drilled into data which suggests that globally the investment community perceives that Canadian tech has lost it’s competitiveness.  And in The precursors of success are here, I make the argument that the educational and industrial infrastructure for successful technology businesses exists in Canada, and when compared to US tech centers like Silicon Valley and Boston, the missing ingredient is investment. 

Ottawa’s Peter Childs mailed me a summary of points that he planned to present to MP Paul Dewar at a Saturday session titled “Community Dialogue on Economic Priorities”.  While Peter’s focus is on Ottawa specifically, much of what he says is true for the Canadian tech sector at large.  Peter’s approach is to push for additional tax breaks for private industry that invest in technology, rather than a direct government funding source plus look for ways to reduce the regulatory burden on Canadian businesses.  What he’s asking for makes sense, and will encourage the growth of a financial sector that can encourage Canadian technology businesses.   Here’s Peter’s email to me.  Feel free to write your own MP and use as little or as much of Peter’s email as you like.

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  • Ottawa is losing its tech industry. Changes in several areas of government regulation and approach could have a huge simulative effect by leveraging personal and institutional investment.
    1. Investment in start-ups must be encouraged. This can be done by decreasing the capital gains that are taxed if these companies are successful and increasing the capital losses that can be claimed if they fail.
    2. Change the SRED and IRAP rules to allow individuals to claim sweat equity contributions at a rate determined by their last paid position – and paying grants only on profitably (this allows the accrual of offsetting grants that can either “sold” for capital on the risk market or saved to offset tax payments or directed to commercial promotion.
    3. Remove tax regulations that put Canadian tech businesses at an international disadvantage. Examples include the way CRA values options at the time of grant instead of the time of redemption. (Options are used to confer value to key employees while preserving the company’s immediate cash position for growth, promotion or research.) They are unusable to Canadian tech companies because the downside risk in the current rules means accepting options if the companies stock could falls can (and has) bankrupted employees. This puts Canadian companies at an international disadvantage.
    4. Develop an Eastern corridor (Quebec City to Windsor) Tech Economic development agency to bridge and connect local centers and encourage the flow of ideas and personnel. To compete globally we must increase the population base for tech incubation, research and professional development to match those of our key competitors.  This means connecting regions – and moving beyond the Toronto – Waterloo corridor that is currently in fashion.
  • Examine and remove regulatory impediments to clean/green & tech industries, and develop legal frameworks to support alternative methods of service delivery.
    1. Regulatory obstacles or lack of legal frameworks hamper the conversion to many alternate technologies (hardware/software and process) and often serve only to protect entrenched companies and approaches. This issue applies to everything from green technologies to inner city granny flats that allow greater home care. Some years ago I spoke to an Ottawa manufacturer of solar water heaters. His biggest obstacle to expanding into the home market was that CMHC had not developed (and was not planning to develop) building code recommendations for roof mounted hot water systems of his type. Each sale required an engineers report to be filed with the building permit. Needless to say he is no longer in business – with the loss of an innovative Canadian technology and local employment. Similarly rules surrounding granny flats prevent them being usable in most cities where the need actually exists. More over there is no legal framework to allow temporary housing that is the desired solution to this problem for both care givers and entrepreneurs.
    2. Similarly CRTC inaction on SMS fees means that Canada is a development backwater for this rapidly growing alternative or augmentation to smart phone applications – limiting innovation, local company growth and methods of service delivery.  
  • Encourage government to trial / buy early versions of company’s technologies, or provide grants/tax relief to companies that trial and invest in new technologies.  Early customers are critical to perfecting products as customer knowledge is critical in understanding and generalizing the problem set. At the same time investment in technology has proven to be a key component to the success and international competitiveness of businesses that invest in them. Increasing the rate of adoption and moving the entry point to earlier in the curve would have a huge effect on Canadian businesses allowing them a broader competitive footing internationally while encouraging tech company growth.  
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