While doing a little research recently, I was surprised to learn that relatively few people know how taxes are calculated. Of the 52.7 cents we pay on each incremental dollar earned, only 21.4 cents go to the Province. Provincial taxes are a percentage of federal taxes, i.e. they are taxes on taxes. In fact, there are four levels of taxation - federal tax, provincial tax, and both federal and provincial surtaxes. I recently asked a former finance minister if he could recall the origin of the surtaxes, i.e. if they were a temporary measure of some sort. He could not recall.
Interestingly, Paul Martin is pondering the House of Commons finance committee's recommendations for deep cuts in personal taxes which, if implemented, could cause the provinces to lose as much as $600 million in tax revenue.
In good economic times, such as now, it is affordable (not to mention economically and politically correct) for governments to reduce personal tax rates and that appears to be happening. So, as a reward for good fiscal performance, we get a little tax break. Wonderful!
But, what about a tax deal? We are forgetting that investment drives development. Our fledgling high tech startups are still starved for early stage, high-risk investment capital. Although the supply of venture capital has greatly improved over the past few years, and the public markets for new IPOs also appear healthy, there is still a critical gap in the early part of the financing spectrum. This is a crisis situation.
Even if investors, e.g. Angels, are found, what kind of a deal do they get for their bravery? Denny Doyle, Ottawa's high tech guru, has long advocated a capital gains tax exemption for patient investors. For example, investments held for a long period of time, would get a proportional exemption in capital gains taxes. That would certainly encourage this type of investment.
Another deal being proposed in B.C., by Harry Jaako of Discovery Capital and championed by the VSE and a number of industry groups (TIA, BCBA, Vancouver Board of Trade), is the idea of a tax credit. The proposal is to take the current VCC (Venture Capital Corporation) program and extend it to individual investors, i.e. eliminate the requirement for a holding company and give individual investors a 30% tax credit if they invest directly in qualifying companies. The total funding ceiling would also be increased substantially. Stock options being exercised should also qualify for the credit. And, by the way, it has been demonstrated that programs like this are "tax neutral" in the first year. This means that there is no net tax revenue reduction or cost to the province, only pluses - like more jobs.
In high tech, most "nouveau millionaires" made their money by creating wealth and generating capital gains for themselves. They did not get rich by writing big pay cheques for themselves. Equity and stock options are the way to riches for technology folks.
The way I see it, taxes impact two key
capital issues: the supply of human capital and the supply of investment
capital. To build good technology enterprises, you need both good people
and investment. The tax credit proposal would attract both.
Copyright, 1999.