5 reasons to build your technology company in Canada

What do Telus, Power Financial Corporation, and RBC have in common? They’re all Canadian and they’re all doubling down on technology startups. RBC, for example, started an accelerator, where the culmination of the curriculum is an eventual investment. Others, like Telus, have put aside a corporate venture fund primarily driven by synergy opportunities.

Similar to the growth of corporate venture building, private venture capital is bullish on the Canadian tech sector. According to a CVCA report, in 2017, $3.5B of venture capital was deployed over 592 deals, surpassing both 2016’s deal count (534) and total capital invested ($3.2B) by 11%.

Government is picking up on the trend as well. While some countries have taken a hard stance on immigration, the Canadian government realizes that talent is a primary driver of successful new venture building. Canada has enacted a program called Global Skills Strategy, whereby requests to hire foreign talent are processed in two weeks’ time.

Some Canadian cities, though not unanimously agreed upon by the startup community, have even branded themselves as “Silicon Valley North”. Delegations are being deployed all over the world to showcase the Canadian ecosystem and attract promising technology startups to join the revolution.

Source: Go North Canada

One thing is for certain, the start-up race is on, and Canada is a promising contender.

For the last sixteen years, we’ve worked with the who’s who of domestic and foreign growth-stage tech companies. Our experience helping these companies maximize their SR&ED funding leads us to the conclusion that Canada is the most strategic country to host your HQ and here are five reasons why.

Government Incentives and their Effect on Cash Flow

The primary government incentive that exists in Canada is the Scientific Research & Experimental Development (SR&ED) tax credit. It’s a $3.5 billion incentive that rewards innovative companies for investing in research and development.

For example, let’s take a Canadian-controlled B2B Fintech company with an office in Montreal and six full-time T4’d back-end developers. For every dollar spent on developers’ salaries, the Fintech can expect to receive up to 74% back in cash.

So, for the sake of simplicity, assuming all six developers are dedicating 100% of their time to eligible R&D, at $75,000 per year per developer, the SR&ED tax credit will yield you a maximum cash refund of $322,000 (the first $50k in eligible expenditures are written off on the provincial side).

In this example, there are other tax credits that can be combined with SR&ED, such as the Development of E-Business tax credit, but the interaction between both programs merits a separate article.

The Industrial Research Assistance Program (IRAP) is another great government incentive that is offered to innovative companies. Companies can receive a grant that covers up to 75% of project costs with actual disbursements varying between $50,000 and $500,000 per company. Bear in mind that unlike tax credits, grants cannot be applied retroactively – applications must be filed and approved before the eligible expenses are incurred.

Quality of Technical Talent

So, it makes financial sense to have your team in Canada, but is the technical talent available? A 2016 Laziridis Institute survey discovered that Canada does not lack in technical talent as much as it lacks in management and executive talent.

In Montreal alone, there are eleven universities, sixty colleges, and, subsequently, the highest number of post-secondary students in Canada.

Within the context of AI, Canada is home to pioneers like Geoffrey Hinton (University of Toronto), Yoshua Bengio (University of Montreal), and Richard Sutton (University of Alberta). Their research has attracted graduate, doctorate, and post-doctorate researchers and data scientists from all over the world to study under their tutelage. Not only has this created a more diverse talent pool, but it has sparked massive investment in bridging the gap between research labs and industry.

Google gathered leaders from the AI community to discuss what makes Canada such a unique marketplace for AI.

Source: Google Canada

Borealis AI, RBC’s research institute, created a fellowship program and put together a recruitment video that accurately describes Canada’s position in AI.

Source: Borealis AI

Nevertheless, should you not be able to find the talent you need in Canada, the Quebec government has a great incentive to attract foreign talent. A five-year personal income tax holiday is available to eligible foreign researchers and commercialization experts.

For example, as a private company in Quebec, if you hire a Director of Engineering from outside of Canada at $140,000 per year, that candidate will not have to pay any provincial income tax for two years. At that income bracket, the provincial effective rate accounts for approximately 50% of total income tax, so it’s a huge bonus.

Here’s the full five-year schedule for a qualified candidate:

Source: Revenu Québec

Most Competitive Operating Costs in North America

Another piece of the puzzle that makes Canada an undoubtedly great location for high-growth technology companies is the comparative low-cost of operations. Every dollar saved in utilities, labor, or rent, is another dollar spent on shipping product or delighting customers.

For example, when combining the costs of rent, electricity, and labor, Montreal has always ranked as the most affordable Canadian city. According to Montreal International, Software Development and Gaming sectors respectively enjoy a 14.5% and 21.7% cost advantage over nineteen of the largest metropolitan areas in North America.

The average cost per square foot for an A-class office space in downtown Montreal is $21.00 CAD, whereas an equivalent office space in Midtown Manhattan will cost $109.93 CAD per square foot (exchange rate = 1.314).

The Legal Case for Canadian-Controlled Corporations (CCPCs)

If you’re debating whether to incorporate in Canada or the US, here’s a very thorough comparison of both alternatives.

To summarize the findings, from a corporate perspective, CCPCs are entitled to a higher SR&ED tax credit rate. In some instances, it is double that of foreign-controlled companies. Below is a summary of federal rates (provincial rates can be combined) for a fictional company with $5 million in eligible SR&ED expenditures:

Source: Government of Canada

CCPCs also enjoy a preferential federal income tax rate called the Small Business Deduction (SBD).

From a founder’s perspective, a one-time capital gains exemption of approximately $800,000 is available for Canadian shareholders upon a liquidity event (merger or acquisition). The shares need to be held for a minimum of twenty-four months and the exemption can even be deferred should you launch subsequent businesses.

Support Services for Early-Stage Entrepreneurs

Early-stage business incubation and acceleration is what Canada prides itself on. Support organizations like MaRS Discovery District, Notman House, Fundica, or New Ventures BC have an important role to play in building an environment for entrepreneurial success by getting involved in the community and paying it forward.

Accelerators with proven track records like Communitech, FounderFuel, CENTECH, Innovacorp, or Creative Destruction Lab are oozing with experienced mentors looking to help you grow and succeed. Moreover, they get you in front of top tier investors around the world.

Why Canada Should Excite You

If you’re a serious entrepreneur on a mission to grow your company, you want to make sure you equip yourself with every tool possible and manage all variables within your control.

The Canadian ecosystem facilitates these two things. It also ensures you have access to the highest quality of technical talent and enables you to grow by keeping operating costs under control.

How R&D Partners Can Help

If you have questions or comments about building your team in Canada, please do not hesitate to contact Mike Lee, President of R&D Partners at 1-800-500-7733 for more information.