Law Times

Law Times • November 22, 2010 An online resource 1.800.263.3269 Focus On ENVIRONMENTAL LAW Biotech lobbies for flow-through shares Proponents hope tax provision would be boon for clean-tech companies BY JULIUS MELNITZER For Law Times extend fl ow-through shares to the sector. A fl ow-through share is a type of share A that allows corporations to transfer explo- ration and development expenses to in- vestors who can then use them as deduc- tions against personal income tax. Eligible corporations are those involved in the ex- ploration, production, and processing of certain commodities such as minerals, oil and gas, and renewable energy. According to Rick Sutin of Ogilvy Renault LLP's Toronto offi ce and a lead- er in the fl ow-through movement, the current lobby to extend fl ow-through shares is based on a new approach. "We've reframed the issue," Sutin says. "Our argument used to be based on the fact that the industry was dy- ing and needed help, but ultimately we concluded that there's no justifi cation for what we want just because our in- dustry is in trouble." Instead, BIOTECanada is focusing on the fact that the sector's innovative potential presents a tremendous social and economic opportunity. "If we could translate the success of fl ow-through shares from the resource sector to the biotech section, it would create a gargantuan opportunity for the country," Sutin says. "Th at's a message that's starting to resonate and that's the reason why we're fi nally getting some traction in our eff orts." BIOTECanada's eff orts on the fl ow- through share issue include a submis- sion to the 2011 federal budget consul- tations by the standing committee on fi nance and an off er to give input to the upcoming work of the federal research and development review panel headed by Th omas Jenkins, executive chairman of OpenText Corp. "Flow-through shares can become fter years of talking about it, Canada's biotechnology industry has mounted a serious lobby to the path to leadership in the clean innovation economy by meeting the need for risk capital required to com- mercialize the discoveries generated by our world-class, government-sup- ported research and development," Sutin says. "Th ey are only attractive to industries that require signifi cant capital to make expenditures that are not needed to off set revenues because revenues are uncertain and remote." Flow-through shares for Cana- dian resource exploration and de- velopment found their way into the Income Tax Act about 20 years ago. About 10 years ago, the government extended them to certain renewable energy technologies, particularly wind power. "Th e program has had spectacular success in the resource sector and was a signifi cant factor in kick-starting our wind-power build-out," Sutin says. As he points out, since the creation of fl ow-through shares, Canada's cap- ital markets have become the global leader in resource fi nance. It has also be- come home to more resource companies than any other country in the world. At the same time, Canadian companies are engaged in more global exploration and development than businesses from any other country, allowing Canada to at- tract the top talent in the fi eld. "Flow-through shares act as an incen- tive to private-sector investment like no other government incentive program as they are only triggered by private-sector investment, resulting in signifi cantly more capital invested and deployed than is the case with any other govern- ment incentive program," Sutin says. Th e biotechnology sector's contribu- tion to the Canadian economy is estimat- ed at $84 billion, which amounts to 6.9 per cent of GDP and is more than the au- tomotive and aerospace sectors combined. Although Canada represents only 1.8 per cent of the global economy, it provides Extending flow-through shares would 'create a gargantuan opportunity,' says Rick Sutin. nearly four per cent of the biotechnology sector's global revenues. On a per-capita basis, Canada's biotech sector ranks sec- ond only to the United States. Of the 663 biotech fi rms across the country, some 40 per cent of them are working on industrial and environmen- tal solutions to make production more effi cient and the environment cleaner. For a host of reasons, however, bio- tech companies rarely get funding through traditional fi nancial institu- tions such as banks. Unlike mining, oil, gas, and the automotive sector, 90 per cent of the biotech industry involves small- and medium-sized enterprises. Although 50 per cent of the companies in the sector have less than 20 employees, the indus- try as a whole employs more than one million workers. According to the Or- ganisation for Economic Co-operation and Development's science, technology, and industry scoreboard for 2009, the biotechnology sector accounts for 11 per cent of research and development spending by Canadian businesses. Th e sector is also diff erent from other technology-based industries. It involves pure science; has a high level of risk associated with scientifi c devel- opment; tends to be highly regulated; and has long development cycles re- quiring patient capital. As a result, raising the $1 billion in capital the sector needs every year is a perennial problem. Since 2007, ven- ture fi nancing for it has fallen by 56 per cent. "In any case, Canada's venture capital industry is too small to com- pletely fund our needs," Sutin says. "Flow-through shares can fi ll the gap as they did for resource exploration by providing venture capital at pre- mium valuations through the public markets." According to a recent study pro- duced by PricewaterhouseCoopers LLP, extending fl ow-through shares to the sector would add $558 million to GDP along with $336 million to wages and salaries; create almost 8,000 jobs; and boost tax revenues by more than $80 million. Sutin also believes extending fl ow- through shares to the innovation sector would produce other benefi ts. "A fl ow- through program would attract hard eq- uity from investors outside of Canada. Th e hard fi nancings would promote global endeavours despite the fact that ex- penditures from fl ow-through shares are earmarked for Canada, and this country will become a global leader in an impor- tant sector," Sutin tells Law Times. "Fa- cilitating all this is the fact that Canada, led by the Toronto Stock Exchange and the TSX Venture Exchange, already has world-class capital markets with global leadership in the resource sector." 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• Cover
• Libel Ruling Appealed
• Double-dipping
• Focus On Environmental Law