It’s Easy for US Angels to Invest in Canadian Companies under the New Tax Treaty
I just finished a very interesting web conference: Cross-Border Co-Investment for Angel Investors: What You Need to Know to Invest in Canada.
Matey Nedkov de Lacamp got the ball rolling for this idea while we were together in Atlanta at the National Angel Capital Association Summit in April. Bryan Watson from the Canadian Angel Capital Organization put together the web conference. Many thanks to you both.
There were over 30 people on the call including a number of tax lawyers on both sides of the border.
I was very pleased to learn how the new tax treaty between the US and Canada works for angel investors. This was especially interesting for me because I am a member of the executive of the Bellingham Angel Group. About a third of the investments from the Bellingham angels are in Canadian companies.
This is my understanding from the web conference as it relates to US angels investing in Canadian companies:
If a US angel invests directly into a Canadian company there are no additional taxes to pay at the time of the sale.
When the exit occurs, some buyers may decide to withhold 25% of the non-Canadian investors’ proceeds and then send these to the Canadian Tax authorities under Section 116. The buyers do this to protect themselves, because if some shareholders were not US residents, the investors would not be protected by the new treaty and some taxes might be payable in Canada.
Neither the US investor, nor the buyer, absolutely has to withhold, or remit, this amount. If they are comfortable that the US investors are US residents, then there will be no tax to pay and no need to withhold the 25%.
For individual angel investors, or for small sized angel funds, it is a simple matter to show they are US residents.
The only time Section 116 becomes problematic is with large funds, like Venture Capital funds, where there are many investors, international investors, corporate investors etc. In these cases, the paperwork to show that all of the investors are in fact US residents becomes burdensome. In these complex cases, the buyer may not be comfortable and may decide to submit the 25% withholding to the Canadian tax authorities.
In conclusion: for US resident angels investing in Canadian companies there are no forms to fill out. If the buyer is sophisticated there should not be any withholding when the company is finally sold.
If the buyer is not comfortable that the US investors are US residents they may withhold 25% of the proceeds that are due to the non-Canadian investors. If they do, it will take a few months for the angels to get the last quarter of their proceeds.
This is my understanding of the web conference. Please confirm this with your tax advisor.
This is a link to the PowerPoint slides and audio recording courtesy of Bryan Watson of the National Angel Organization.
I’d appreciate comments from anyone who is knowledgeable in this area.