Investor Tax Credit Program for Small Startup Businesses in Saskatchewan

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Investor Tax Credit Program for Small Startup Businesses in Saskatchewan

Investor Tax Credit Program for Small Startup Businesses inSaskatchewan

Affiliated Institution

Executive Summary

The Canadian businesses have historically experienced a majorbusiness recession which was unfavorable for business investments andacquisition of capital was a major concern for many potentialbusiness persons in the region. Most of the Canadian startupsbusiness had to source capital from other avenues since investorschanneled their money to other regions.

British Columbia, Nova Scotia, New Brunswick and Manitoba are amongthe provinces within Canada that have successfully adopted theinvestment tax credit program to improve the performance of theirretail and nonretail sectors of their economy. Some of thecharacteristics and trends that hints on why most Investors preferQuebec and Ontario to other Canadian provinces includes, dealStructure, deal size, company size and investment patterns.

Saskatchewan lost more than 1% of its population in a decade between1996 and 2006 due to the devastating economic status. Migration toother provinces in the region was inevitable in search for betteropportunities. It has been recovering gradually from the recessionwith a record of Real GDP on the rise since 2007. Despite havingseveral investment tax credit programs in Canada, Saskatchewanprovince lags in the adoption process of these programs as the bestalternative for its economic development. This study sought toexamine some of the most successful tax credit incentive programsfrom other provinces and recommend for Saskatchewan.

The study concludes that there is need for the Saskatchewangovernment to adopt the investment tax credit program to encouragemore investors from other provinces and regions thereby increasingthe revenue collection.

Tableof Contents

Executive Summary 1

Chapter One: Introduction 5

1.1 Definition of Terms 5

1.2 History of Investment Tax Credit for Startups in Canada 5

1.2.1 Canadian Investor Tax Credit Programs 5

1.2.2 Saskatchewan Province Economic Statistics 7

1.2.3 Angel Investor/ Venture Capital 11

1.2.4 Angel Investor in Saskatchewan 13

1.3 Problem Statement 14

1.4 Scope and Objectives of the Project 14

Chapter Two: Investor Tax Credit Programs 16

2.1 British Columbia Equity Capital Program 16

2.1.1 Economic Analysis and Evaluation 16

2.1.2 Economic Influence of Venture Capital Tax System 17

2.1.3 Employment Evaluation 18

2.1.4 GDP Contribution of Startup Small Businesses 19

2.2 Nova Scotia Equity Tax Credit Program for Small Businesses 20

2.2.1 Economic Analysis and Evaluation 22

2.2.2 Economic Influence of Equity Tax Credit Program 23

2.2.3 Employment Evaluation 23

2.2.4 GDP Contribution of Small Startup Businesses 24

2.3 New Brunswick Investor Tax Credit for Small Businesses 24

2.3.1 Economic Analysis and Evaluation 25

2.3.3 Employment Evaluation 25

2.3.4 GDP Contribution of Small Startup Businesses 26

2.4 Summary Table of the Angel Tax Credit Programs in Canada 27

2.5 Effectiveness of the Investor Tax Credit Policies 29

Chapter Three: Angel Investors in Quebec And Ontario 30

3.1 Angel Investors in Ontario (ON) and Quebec (QC) 30

3.2 Factors Contributing to Concentration of Angel Investors Within Central Canada 31

3.2.1 Deal Structure 32

3.2.2 Deal Size 32

3.2.3 Investment Patterns: Distance 32

3.2.4 Company Size 33

3.2.5 Other factors 33

3.3 Small Business Contribution to Saskatchewan GDP 33

3.4 Policies Best Suited for Saskatchewan Angel Investment 35

3.5 The Role of Angel Investor Organization in Saskatchewan 36

Chapter Four: Conclusion and Recommendations to Saskatchewan 37

4.1 Conclusion 37

4.2 Recommendations to Saskatchewan 38

References 40

Appendices 44

Table 1: Economic Development Funding and Support Programs Offered (ERDT) in Canada 44

Table 2: Retail breakdown of Employment 45

Table 3: Tax credit and taxes aggregate 46

Figure 1: SMEs Contribution to GDP in Canada 46

Chapter One:Introduction1.1 Definition of Terms

Startupnew small businesses: A startup is the beginning of a new thingor activity. In business, a startup can be considered as a newventure of any form of business that is in its initial stages ofoperation. The new ventures are usually financially supported bytheir respective entrepreneurial founders as they try to bring to themarket a new service or product which they think will have a greatdemand in the market.

Investortax credit for startups: A taxcredit is an amount of money that is legally allowed for thetaxpayer&nbspto remove fromthe total amount of taxes that the taxpayer owes the government.Every kind of business and locations have their unique tax creditsfor different businesses.

Venturecapital: this is the loan capital, equity capital or startup thatis offered to the business person by an established venture on behalfof other fund providers. It is also called risk capital.

Angelinvestor: This is a person who invests his or her money in abusiness venture giving money for expansion or a startup. Angelinvestors are people who have extra money and are always in search ofinvestment opportunities that would give them higher returns.

EquityFinancing: This is theprocess where a business raises capital by selling part of theirshares. Equity finance is mostly done by companies through sale ofshares to raise funds or increase their capital base.

1.2 History of Investment Tax Credit for Startups in Canada 1.2.1 Canadian Investor Tax Credit Programs

The Canadian businesses have historically suffered the challenge ofobtaining capital to grow. Historically, the investor funds in Canadahave always been channeled towards the Silicon Valley businesses(Pofeldt, 2017). This means that most of the Canadian startups haveto look for the capital from other avenues like raising funds fromfamily, and financial institutions which either disappoints them oris very expensive in the long-run in-case they acquire the funds.

Canadian governments have however made a number of efforts inimproving the business tax system. This has specifically led toenhanced tax neutrality over all the industries in Canada, andspecifically for the bigger and well established companies byreducing and unifying the rates of income tax, harmonizing sales tax,totally removing capital tax, and properly matching the capital costallowance (Pofeldt, 2017).

One such reforms was by the Technical Committee on Business Taxation(Mintz Committee). They identified that most of the taxes by thegovernments meant for the startups and small businesses are veryfriendly, yet the corporate taxes are heavily punishing. Theytherefore suggested a reduction in the general corporate tax rate.Canadian venture capital fundraising was set to new heights in 2016which marked an 81% increase over the previous year (Beaman, 2017).

Accordingto Statistics Canada 2014, Saskatchewan recorded $59.3 billionincrease in GDP which was 1.6% up from 2013 (Statistics Canada,2014). Evaluating the Canadian provinces of SK, Manitoba, NB and BCusing the per capita as a metric measure of the GDP in 2014, theresults were as shown on table 1 below.

Table 1: Provincial GDP and Position Regionally (2014)

Province

BC

SK

MB

NB

NS

Provincial GDP (CAD Million)

$237,188

$82,780

$64,077

$32,056

$39,077

Position (out of 13)

1st &amp 4th overall (12.02%)

2nd &amp 5th overall (4.19%)

3rd &amp 6th overall (3.24%)

5th &amp 9th overall (1.62%)

4th &amp 7th overall (1.98%)

Source: Statistics Canada, 2014

1.2.2 Saskatchewan Province Economic Statistics

Between the years 1996 and 2006, Saskatchewan lost more than 1% ofits population. Young people were basically leaving to otherprovinces and states to find for themselves better opportunities.However, for the last 6 years, the province has experienced anaverage growth rate of 6.7% to pass the level it was at in 1986 (Brad2014). This growth has been attributed mainly to Canadians relocatingto Saskatchewan from other provinces.

Saskatchewan has risen again from the bad days, with the Real GDP onthe rise since 2007. The province reported a 4.8% real GDP in 2010,which was much higher compared to the Canadian average of 2.6% duringthat time. In 2012, the province experienced growth in employment bymore than 20,003 to the highest rate of 550,000 (Brad, 2014). Theprovince was expected to have the best growth rate in Canada duringthe 2013-2014 period. The figure below depicts the performance of thelabor force sector of the Saskatchewan economy over a decade.

Thestrong economic growth in Saskatchewan has been attributed to hugepopulation growth ever experienced since 1921. Strong economic growthhas especially sparred the province economic growth.

Saskatchewan real GDP has grown from $37.6 billion in the year 2007to $41.2 billion in the year 2011. This was a 9.6% growth rate,double that of either B.C and Alberta (Brad, 2014).

Figure 1.2: Saskatchewan Real GDP

The Saskatchewan private capital investment grew from $9.9 billion to$16 billion between 2007 and 2011. During the same period, thepublic-sector capital investment also increased from $1.8 to $3.3billion (Brad, 2014).

Figure1.3: Saskatchewan Private and Public New Capital investment

The Saskatchewan export value grew from $16.4 billion to $29.6billion from 2006 to 2011 (Brad, 2014).

Figure 1.4: Saskatchewan Export of Goods

Saskatchewan employment also grew from 504,400 to 525,900 from theyear 2007 to 2011, representing a yearly growth rate of 4.3% (Brad,2014). This growth was higher than Canadian average and lower thanAlberta average growth.

Figure 1.5: Employment by Province (000)

Saskatchewan average wages increased from $749 to $878 between theyears 2007 and 2011, representing a 4.1% yearly growth rate. This wasthe third highest of all the Canadian provinces rates. The growth wasalso higher than the Canadian average rate of growth of 2.6% duringthe period (Brad, 2014).

Figure 1.6: Average Annual Growth Rate of Average Weekly Earnings2007-2011

The growth experienced by Saskatchewan in the wage rates, populationand economic growth contributed towards a stronger consumer demand,which in overall led to economic growth of the province. TheSaskatchewan retail trade value jumped from $11.6 billion to $16.2billion between the years 2006 to 2011 (Brad, 2014).

Figure 1.7: Retail Trade in Saskatchewan

1.2.3 Angel Investor/Venture Capital

The Multilateral Development Bank report gives very importantcomparisons regarding the incentives and program structures amongstthe different Canadian provinces including Manitoba, Nova Scotia,Saskatchewan, Newfoundland and Labrador, and New Brunswick (EBRDPress Office, 2016).

Figure 1.8: Nova Scotia Jobs Fund Disbursements

Source: Nova Scotia Jobs Fund Disbursements, 2009-2013 (Traves,2014)

Figure 1.9: NSBI Disbursements

Source: NSBI Disbursements, 2009-2013 (Traves, 2014)

Figure 1.10: Innovacorp Disbursements

Source: Innovacorp Disbursements, 2009-2013 (Traves, 2014)

Table 1.0 on the appendices gives a summary of some of the EconomicDevelopment Funding and Support Programs (ERDT) offered in differentCanadian provinces

1.2.4 Angel Investor in Saskatchewan

A Multilateral Development Bank (MDB) provided a report regardingincentives and program structure among five Canadian provincesincluding Saskatchewan (EBRD Press Office, 2016).–&gt Need link forthis source!!! Nova Scotia was the most favored of thefive-reporting availability of more incentive tools. Saskatchewanmost recently reviewed its offerings and do not give loan guarantees,venture capital investments, community grants, and payroll rebates.

Table 1: The Incentive tools use in NB, NS, Manitoba,Saskatchewan, and Newfoundland

Source: The Incentive tools use in NB, NS, Manitoba, Saskatchewan,and Newfoundland (Traves, 2014)

1.3 Problem Statement

Saskatchewan province economy is one of the best performing in theregion, attracting a significant number of investors to the region.Despite having several investment tax credit programs in the region,there are no incentive programs for startup small businesses inSaskatchewan. This study sought to examine some of the mostsuccessful tax credit incentive programs from other Canadianprovinces and make suitable recommendations for Saskatchewan.

1.4 Scope and Objectives of the Project

The study focuses on the investment tax credit incentives and venturecapital credit programs that are provided within the region in otherprovinces such as Nova Scotia (NS), British Columbia (BC) and NewBrunswick (NB). The study adopts secondary sources for both data andliterature review to be substantive and factual.

The main objective of the study is to analyze and evaluate differentinvestor tax credit programs in BC, NS and NB provinces and providerecommendations on potential tax credit programs for small startupbusinesses in Saskatchewan province. Another objective is todetermine whether angel funding program or venture capital fundingprogram is suitable for implementation in Saskatchewan.

Economic development has its grassroots from the least form ofbusiness units (small Startup Businesses) to the largest in theregion (Multinational Corporations). Business performance is veryessential to the growth and development of the Canadian economy atlarge. Therefore, there is need to ensure a successive and similaradoption of business and economic strategies that ensure a perpetualand diversified economic development throughout the region.

Chapter Two: Investor Tax Credit Programs2.1 British Columbia Equity Capital Program

The British Columbia (BC) established the tax credit program tosupport investors. The program offers a 30 percent refundable taxcredit and $60,000 maximum yearly credit to small businesses that areeligible. The investment can be made straight to the small business,but the principal should, however, be retained in the company for aminimum of five years (Small Business Venture Capital Tax Credit -Province of British Columbia, 2017).

2.1.1 EconomicAnalysis and Evaluation

British Colombia has been experiencing high levels of entrepreneurialactivity since the introduction of the program. The angel levycredit has given the citizens a motivation to enhance investments atthe early stage. This has majorly been seen in new ventures elevatedgrowth likely, which in turn has led to more job opportunities thatare higher paying hence increase in duty revenue (Hungerford, 2013).Retail breakdown of employment is available in the appendix table 1.

From the table, the companies that fall under the program has beenable to create averagely 2.43 new jobs annually, which isapproximately 18% of the employment average. Enterprises that arebacked by retail generate 5.25 new job opportunities in each companyin comparison to 1.08 in from rims that are non-retail backed. Morethan 93% of the jobs are created in British Columbia, and the jobsare full time which is good for the province economic development(Canada, Canada Revenue Agency,2014). Also, the program has also beenable to generate larger taxes from the receiving companies incomparison to the total sum of tax credit that was given to theBritish Colombian investors. The firms involved in the programraised taxes amounting to $747.61. Which is accurate at the federaland provincial levels, also the same can be said to venture capitalprograms in nonretail and retail portions (BCStats, 2012).&nbsp

Table 2 in the appendix estimates that for each $1 issued of theprovincial tax credit, beneficiary firms produce provincial taxes of$1.98. While each $1 of Canadian that is both the federal andprovincial tax credit given out, they were able to produce $2.92 inthe form of Canadian taxes.

2.1.2 Economic Influence of Venture Capital Tax System

Most investors would prefer this program so as to benefit from theattractive investment returns, in spite of the tax benefits thatmight come from such an investment (MacLeod,2015). The program is beneficial to investors since they canreduce substantially on the out of pocket expenditure. This is one ofthe advantages that companies enjoy from investing in the VCC programand holding them in a registered retirement savings plan.

Entrepreneurship plays an integral role in the growth and developmentof any economy, and venture capital plays a critical role in thisdevelopment process. This is because venture capitalist isresponsible for providing the required funds for entrepreneurs tohire workers, innovate and generate wealth in the financial system.The venture capitalist tax program has also been an integral part ofthe economy due to its support for innovation. Its support forinnovation originates from its ability to turn basic science andideas into services and products which are the foundation for newbusinesses which generates jobs and economic activity (Hellman &ampSchure, 2010).

Also, the companies that benefit from the venture capital tax systemhave been able to grow faster and come out as a business,laboratories, and research centers. The enterprises that benefit fromthe program also become more global and more rapid to reach aninitial public offer (IPO). These companies` returns on performancealso post an initial public offer that is much higher in comparisonto those that do not benefit from the venture capital tax program.Lastly, firms that benefit from the tax system are mostly exportoriented and likely to participate in the international economy(Markey, Halseth &amp Manson,2012).

2.1.3 Employment Evaluation

The Canadian private sector employed over 11.6 million people in2015. As indicated in the figure below most of the employees workedin small business, making up 8.2 million that is 19.8 percentemployed in the private sector.

Figure 2.1: Private Employment Total by Market Size, 2015

Source: SME Research and Statistics,2017

In comparison, 2.3 million, which is 19.8 percent are employed bymedium – sized businesses while 1.1 million, which is 9.7 percentare employed in large firms of the private sector labor force.

Chart 2.1: Employment

Source: The Daily Labour Force Survey, January 2017

The tax investor system made it possible to establish small andmedium entrepreneurship thereby increasing the number of jobs. Fromthe above chart, it’s evident that the rate of employment has beensteadily increasing since 2012.

2.1.4 GDP Contribution of Startup Small Businesses

By December 2015, Canada was up with 1.17 million employerbusinesses. Out of this number 97.9 percent, that is 1.14 millionbusinesses were small enterprises, while 1.8 percent, which is 21,415where businesses of medium size and .03 percent, which is 2,933 werelarge businesses (Innovation, Science and Economic DevelopmentCanada, 2016).

Table 2.2: Employer business, December 2015

Source:SME Research and Statistics, 2016

Startup businesses also contribute heavily to the GDP with provincessuch as Alberta and British Columbia contributing 32 percent and 33percent respectively. This is above the general average of what iscontributed by small businesses to the national GDP which is 30percent. In B.C small businesses contribute to almost one-third ofthe GDP province. With the small businesses making up 98% of allenterprises it plays vital thread in the B.C economy (ConferenceBoard of Canada, 2013)

2.2 Nova Scotia Equity Tax Credit Program for Small Businesses

The Equity Tax Credit program, abbreviated as ETC, was firstintroduced in 1994 to help the Small Businesses in Nova Scotia,community economic development and co-operative initiatives ingaining access to venture capital/ equity funding. The ETC achievesthis by giving income tax credits for businesses investing in NovaScotia and the CEDIF (Community Economic Development InvestmentFunds) (Nova Scotia Department of Economic and Rural Development andTourism, 2014). ETC is a personal income tax credit, non-refundable,and available to Nova Scotia residents aged 19 and above and whopartake to invest in a company that has been certified by the ETCprogram.

The tax credit is equal to 30% of the invested sum and cannot be morethan $9,000 in any single year. It is mandatory that companies makeapplication through the Department of Finance to be certified beforeshares issuance. The qualified investors who buys the shares in theperiod specified will be given the credit. The credit amounts thathave not been utilized by the individual can be forwarded seven andthree years back.

Since ETC 2002 to 2013, The NS ETC program was able to raise acapital $6.9 million from $401556. This was due to the increase inthe number of investors which was beyond 100% from 81 to 1852 asshown in the table below (Nova Scotia Finance and Treasury Board,2014).

Table 2.3: Nova Scotia Capital Performance

Source: Nova Scotia Department of Finance, 2014

2.2.1 Economic Analysis and Evaluation

Aninvestment report by the CBRE Research Group in 2014 on the NovaScotia ETC identified some of the motivation and beneficial factorsthat inflated the rate of investor turn up were similar to those thatattracted investment growth in BC, Prince Edward Island and CentralCanada (QB and ON) (NACO, 2017) and (CBRE, 2017).

Table 2.4: Investor Motivations and Perceived Benefits

Source: Nova Scotia Finance and Treasury Board, 2014

Theabove analysis identified ETC incentives and tax savings as one ofthe key motivators to the Community Economic-Development InvestmentFunds (CEDIF) projects that were beneficiaries of the Nova Scotia ETCprogram. A total of 454 survey recipients were involved but only 74participants were valid samples that were used for the analysis (NovaScotia Department of Economic and Rural Development and Tourism,2014).

2.2.2 EconomicInfluence of Equity Tax Credit Program

Theadoption of the ETC and tax saving program in the CEDIF projects inNova Scotia was a Benefit to all participants as well as thecommunity. This is attributed to the environmental benefits such asreduction of burning imported coal by harnessing clean local fuel anda greener source of energy that were associated the top motivators inthe CBRE analysis (Nova Scotia Finance and Treasury Board, 2014).

2.2.3 EmploymentEvaluation

Chart 2.2: Nova Scotia Employment Rate

Source: Statistics Canada.

Theanalysis was done using 2006-2016 labor force data from theStatistics Canada database. The rate of employment was depicted toincrease steadily at a decreasing rate from 2006 to 2016. An increaseof about 3.27% was realized in that decade which can be attributed tothe gradual increase of angel investment in the province.

2.2.4 GDPContribution of Small Startup Businesses

Inreference to the table on employment by province in 2015, the NovaScotia recorded a 92.5% of SME employment (Innovation, Science andEconomic Development Canada, 2016). An increase in employment rateleads to an increase in the per capita income which consequentlyincreases the GDP of Nova Scotia.

2.3 New Brunswick Investor Tax Credit for Small Businesses

The New Brunswick Small Business Investor Tax Credit gives a fiftypercent non-refundable personal income tax credit (for theinvestments created after 1st April 2015) for up to$125,000 annually to the qualified Community Economic DevelopmentCorporations (CEDC) and or to qualified small businesses or to theassociations in New Brunswick province.

Beginning 1st April 2014, the Small Business Investor TaxCredit permits the corporations in New Brunswick and trusts to bequalified for a fifteen percent non-refundable corporate income taxcredit for the qualified investments of up to $500,000. This impliesthat the New Brunswick trusts and corporations become eligible fortax credit of $75,000 in case they invest in small businesses andstartups in New Brunswick province (New Nouveau Brunswick Canada,2016). If an investor is not in a position to utilize all the amountallotted by the Small Business Investor Tax Credit in a given year,then the tax credit can be forwarded 7 years ahead of time or back 3years (New Nouveau Brunswick Canada, 2016).

2.3.1 EconomicAnalysis and Evaluation

Areport by Jones in June 2016 to CBC news from a conference board ofCanada suggested that the economy was expected to contract by 0.4% in2016 due to an anticipated recession (Jones, 2016). The figure 1 inappendix shows the general growth of SMEs and their contribution toGDP trends in Canada (Seens, 2015).

2.3.3 EmploymentEvaluation

Chart 2.3: New Brunswick Employment Rate 2006-2016

Source: Statistics Canada, 2017

Therewas a 2.74% increase in employment in 2 years’ time from 2006 to2008. From 2009 to 2016, there has been a decrease of the employmentrate in the NB province. According to an economic review in 2009, thefall is attributed to the turmoil of post-war recession whichaffected most of the economies globally (NB Department of Finance,2010).

2.3.4 GDPContribution of Small Startup Businesses

TheNB investor tax credit program has provided a good businessenvironment for the SMEs to thrive. The spill-over effect of benefitsis also attached to the 1.9% GDP increase recorded in 2016 which waslargely attributed to the performance of manufacturing sector (Jones,2016).

The growth and expansion of different industries within NB provinceis a major contributor to the general Canadian economy. Thesustainable development of the SMEs is therefore a matter of concerntowards economic performance of the economy. The best performingsmall businesses in Canada in 2013 were those in the serviceindustries such as construction, professional, scientific andtechnical services. They were also the same businesses that recordedthe highest disappearances in Canadian economy as depicted in thefigure below.

Figure 2.1: Births and Deaths of SMEs in Canada 2013

Source: Key Small Business Statistics, 2016

2.4 Summary Table of the Angel Tax Credit Programs in Canada

Table2.5: Summary of the BC, NS, UK, NB Angel Tax Credit Programs

Name of program

Maximum amount of credit

investment amount

Investors eligibility

Companies eligibility

Number of employees

Restrictions

Nova Scotia – Equity Tax Credit Program

35% for individuals and none assigned to corporations

Any amount – open

Make application through the Department of Finance to be certified

Nova Scotia

Open

NS residents aged above 19 years.

Must have tangible net asset less than $25million for business

New Brunswick Investor Tax Credit

fifty percent non-refundable personal income tax credit (for the investments created after 1st April 2015) for up to $125,000 annually

Open

New Brunswick resident

the applicants have to make an application for a Certificate Registration, then they finally apply for a Tax Credit Certificate.

Open

Must have tangible net asset less than $40 million.

Must offer to pay 75% of wages to NB residents.

British Columbia Equity Capital Program

30% refundable tax credit with $60000 per investor annually

$ 5 million

BC residents

BC taxable corporations

No more than 100 employees

Pay at least 75% of wages to BC residents and have equity of at least $25000

United Kingdom Enterprise Investment Scheme

20% of non-refundable tax credit with £100000 annual credit limit.

UK residents

UK enterprises

50 employees

Small business with fewer than 50 employees

2.5 Effectiveness ofthe Investor Tax Credit Policies

The net cost-benefit of the ETC for 1994 to 1997 is shown in thetable below. It is calculated as the difference between thecumulative total tax revenue foregone due to the ETC and thecumulative total tax revenue collected as generated by ETC investment(Nova Scotia Finance and Treasury Board, 2014).

The payback analysis from the program determined that the ETC programinvestments between the period 1994 to 1997 will create a positivelyrelated cash flow by the year 2000 in comparison with the provincialtreasury (Nova Scotia Finance and Treasury Board, 2014).

Table 2.6: Cost Benefit Analysis of the Investor Tax CreditPolicies

Source: NS Department of Finance

Chapter Three: Angel Investors in Quebec And Ontario3.1 Angel Investors in Ontario (ON) and Quebec (QC)

The National Angel Capital Organization, abbreviated as NACO, is theCanadian industry association that commitments itself o championingthe Angel investors and their various investments across Canada. NACOrepresents more than 2100 investors who help the Canadian businessesacross different provinces and industry to meet their businessobjectives and to fairly compete on the global platform (NACO, 2017).The NACO members provides corporations with risk capital,professional network and expert advice where the traditionalinstitutions cannot.

In the NACO 2015 report, a survey data was broken down and analyzedwith respect to different Canadian regions (Easter, Central andWestern). The Central Canada (Quebec and Ontario) performed bestcompared to other provinces, accounting for 70% of the investments.This has been the trend for the last few years (NACO, 2015).

Figure 3.1: Investments in Canada

Source:NACO, 2015

Figure 3.2: Angel Group Investment Amounts by Region: 2012-2015

Panel A: Angel Group Medians (per Investment)

Source:NACO, 2015

Panel B: Angel Group Averages (per Investment).

Source:NACO, 2015

3.2 Factors Contributing toConcentration of Angel Investors Within Central Canada

One would be interested in understanding why the two Central Canadianprovinces, Quebec and Ontario are doing better in terms of attractingAngel Investors yet the provinces does not have the government taxcredit incentives. Here are some of the characteristics and trendsthat hints on why most Angel Investors prefer Quebec and Ontario toother Canadian provinces as choices for investment regions (NACO,2015):

3.2.1 Deal Structure

This involved disclosure of the investment package in full details tothe angel investors. Equity investment was the key, with more than96%. Common shares were the most used instrument, followed byconvertible debentures and then presented shares. Co-investment,where more than one investor from a similar Angel group takes part inthe same portfolio of investment. In 2015, 64% of all the investmentsconstituted co-investments, and this has been the trend for the last4 years (NACO, 2015).

3.2.2 Deal Size

The amount of money invested by the Angel groups have been on therise between the years 2012 and 2015, but slightly dropped in 2015.However, the medium deal sizes have been variable. The average andmedium deal sizes were between $1.054 and $795,000, which was notmuch different from the smaller deals with startups (NACO, 2015). Thebiggest deals involved the government and the venture capital funds.This implies that the deals that were made in the Central provinceswere quite substantial in size (NACO, 2015).

3.2.3 Investment Patterns: Distance

It can be observed that a bigger percentage of the Angel investorsare local. Two factors can be attributed to this information spreadfaster and effectively locally implying that the first investor toobtain the information and the closest investor is likely to takeaction faster compared to an investor who is located several milesaway (NACO, 2015). Secondly, investors find it easy to make an impacton businesses with which they share same geographical proximity. Infact, at the screening sage, most investors use the geography todetermine their best bet. This implies that most of the AngelInvestors investing in Ontario and Quebec are from the local market.

3.2.4 Company Size

The Angel Groups are typically interested in the startups and smallbusinesses. From the NACO 2015 data, it is consistent that 70% of theinvestments were done on businesses with below 10 workers. Almosthalf of the participating businesses had between one to five workers.This has been the trend for the last three years (NACO, 2015).

3.2.5 Other factors

Dedicated Staffing

The delegation of operation activities allows group managers todedicate their time and effort where needed.

Availability of syndication

The visible angel market is increasing in complexity, with growingevidence of syndication involving other type of investorsparticipating alongside angel investors (NACO, 2015).

Successful exits

The importance of angel investing is not the amount invested but theeffect of the money in building the businesses. successful exitsimply that the wealth created can be recycled to new investments.

3.3 Small BusinessContribution to Saskatchewan GDP

Saskatchewanhas been thriving due to its natural resource abundance and thediversified industries located in the province. According to therecent Statistic Canada release, the SK real gross domestic product(GDP) rose 0.6% in the fourth quarter last year, following a 0.9%increase in the third quarter. Final domestic demand continued todecelerate (+0.1%), with ongoing weakness in business investment(Statistics Canada, 2017).

Figure 3.3: Business Contribution Towards SK GDP

Source: Statistics Canada, 2017

Theprovince was classified as the largest exporter of per capita in 2014(Statistics Canada, 2014). The current provincial government is aimedat providing a business conducive environment to attract moreinvestment after a gradual decline since 2014. The figure belowdepicts the trend of Saskatchewan new investment both in the privateand public sector.

Figure 3.4: Saskatchewan Private and Public New Capital Investment

Source: Statistics Canada, 2017

3.4 Policies Best Suited for Saskatchewan Angel Investment

Economic development is majorly dependent on the policies andstrategies that each governing administration sets towards certainpublic goals. The government of Saskatchewan visions to secure abetter-quality life for all Saskatchewan residents. This is governedby the plan for growth which is projected at 1.2 million people by2020 (Wall, 2014). The Plan is aimed at identifying and seizingopportunity for sustainable development while combating andmitigating any threats and challenges to their course.

The best suited policies for Saskatchewan province are only thosethat will align with the set goals in this and other plan of growthand development. Some of the policies that can be adopted include thefollowing but not limited to them.

Provide a budgetary that will expand and incorporate both retail andnonretail segments in the province. According to (Hellman &ampSchure, 2010), the retail and nonretail segments have complementaryroles in the BC venture capital program.

Angel investors are focused on only those businesses that are able tomeet their set standards. Some of the considerations made beforeinvestment include business proposals, size of investment, themanagement, type of industry, business location, customer service,due diligince and exit strategies. Provincial government shouldensure all SMEs meet the required standards in order to attract moreinvestors in the province.

Small startup business should devise a clear plan written on themission statement of the business in order to qualify for theinvestment funds from the angel investors since their first interestis on the lay out of the plan written in black and white.

Diversification of the startup businesses is also a key considerationfor the angel investors. This enables them to create competitivecompanies in different sectors and also spread risks over variousinvestments.

According to Halo report, angel investors are more interested inindustries such as software, healthcare, mobile and communication,energy and utilities, consumer products and others (Angel ResourceInstitute, 2016).

3.5 The Role of AngelInvestor Organization in Saskatchewan

Keyplayers in Saskatchewan market that are expected to thrive if theangel investment tax credit programs are upheld by the investororganization based in the province. The Saskatchewan CapitalNetworking Organization (SCN) is one of the angel investors which wasincorporated in 2011 to help promote SME startups and boost the localeconomy. Since the company was first launched, more than 32 firmshave presented their business proposals and opportunities to thepotential investors. More than ten corporations have received $1.7million of investment funds from the investor members of SaskatchewanCapital Network (Saskatchewan Capital Networks, 2017).

The SCN facilitates the introduction of investment plans to eligiblecompanies. The Saskatchewan Capital Network investor members areparticularly interested in funding the technology-based companies,service firms or proprietary products. They are also interested incompanies that have great potential for growth and are already ontheir path to success.

The formation and perpetual existence of the SCN from the initialstages to the assimilation in the business society is very complexwhich makes establishment and evaluation for the cost of existencedifficult. Therefore, there is need for time to perform a thoroughassessment.

Chapter Four: Conclusion and Recommendations to Saskatchewan4.1 Conclusion

An angel investor is aimed at providing financial and advisorysupport for projects that require less capital funding which mostlikely happens to be the startups and small businesses (Ying, 2000).They are commonly considered as the last resort in case financialinstitutions and other lenders deny the SMEs loans.

An investor tax credit program will be ideal for Saskatchewan since asimilar program has worked well for provinces such as BritishColumbia, Manitoba, Nova Scotia and New Brunswick. The benefit forsuch a program is that it will create job opportunities that willimprove the gross domestic product of the province. An increase inthe GDP will encourage consumer spending on goods and services.Companies in the program (investment credit) generated an average of2.3 new jobs every year, net job creation remained positive even inthe recession years 2002 and 2008 (Hellman &amp Schure, 2010).

Theangel network organizations have the responsibility of sourcing forangel investors and providing the link to the SMEs and startupbusinesses in their respective jurisdictions.

Sourcingof capital for startup business and SMEs may be difficult due to theprocedures they undergo to ensure a good business idea for investmentis presented to the potential angel investors in their proposals.

Theeconomic performance of a state can be explained using the GDP of thestate. From the economic analysis of BC, NB and NS we can clearlyobserve a gradual increase in their GDP. These economies wereevaluated and observed to have investment tax incentives that causeda crowding in effect thereby inflating the investment capital in theprovinces.

Investment tax credit will allow Saskatchewan companies to attractoutside investment from other provinces that will break theinter-provincial borders. The program will create more taxes thanthey consume tax credits. The tax credit is deducted from the amountthat they owe the government and is a credit granted for taxesalready paid for.

4.2 Recommendationsto Saskatchewan

The purpose for the research was to advocate for the implementationof tax credit for Saskatchewan to increase capital in smallbusinesses, and expand the economic growth of Saskatchewan.Therefore, stakeholders should come up with ways to encourage angelinvestors activities by establishing an investor tax credit.

An investment tax credit program will be ideal to the economicdevelopment of Saskatchewan as we have seen its contribution toBritish Columbia, Nova Scotia and New Brunswick provinces. This willcreate more jobs and improve GDP productivity in Saskatchewan.Increase in productivity will consequently lead to more revenuegeneration for companies in the province.

Saskatchewan needs to have better angel networks to encourageresident and nonresidents to invest in the province. This can be donethrough the existing SCN or allowing formation of new networks byeasing on governance and regulatory procedures.

An investment tax program is also going to generate more taxescompared to other tax credits since the more business startups withinthe province means more revenue collection sources for the provincialgovernment. This was experienced also in BC, NB and NS discussedabove.

The sustainability of the natural resources endowed to Saskatchewanprovince is dependent on the investment of capital in businessactivities that will reduces utilization of these resources. Thesmall startup business will therefore utilize the available resourceseconomically through sourcing of other alternatives which will beprovided through the angel tax credit programs.

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AppendicesTable 1: Economic Development Funding and Support Programs Offered(ERDT) in Canada

FUND INITIATIVE

DESCRIPTION

Community Economic Development Investment Fund

(CEDIF)

Individual investors are given 35% of Personal Income Tax credit

Aboriginal Community Development Fund

This involves numerous funding streams, and the provincial commitment depends on the project size

Social Enterprise Fund

Interested in organizations dealing with economic, environment and social problems. It is a multiple funding stream

Productivity Investment Program (PIP)

Gives 20% up to a maximum of one million every year geared toward cost of technology and or equipment

Strategic Cooperation Education Incentive (SCEI)

This is incentives for employers to give co-op terms to the learners/ students undertaking recognized co-operative education program

Graduate Placement Program

The program reimburses 50% to the students after three months, up to a maximum of $7,500

Export Ability Program

The qualifying costs include workshop or course registration, exam fees and the course materials

Table 2: Retail breakdown of Employment

Source:Venture Capital Report

Table 3: Tax credit and taxes aggregate

Source:Hellmann Venture Capital Report

Figure 1: SMEsContribution to GDP in Canada

Source: SMEs Operating Performance, (Seens, 2015)