Ever since Radian6 and GoInstant were sold to salesforce.com, there has been a lot of talk about the entrepreneurial ecosystem here in Atlantic Canada. How can we keep churning out great, innovative companies that attract world class companies to invest in or buy our companies, creating both wealth for the founders, their employees and investors and adding high paying jobs to our region? Cloning Marcel LeBrun or Jevon MacDonald is likely not an option so we need to figure out how to support our young companies from inception through their growth stages.

There are different types of support required but in this post I am focusing on money. Companies need money and it will be a key ingredient to consistently repeat the success stories we’ve seen in the past three years. With the province getting out of the investment business, a lot of people are now asking, how do we get more local, private investment?

First we should try to understand whether or not there is enough local money to invest. There is. Research shows there is more than $600billion in RRSPs held by Canadians (Stats Can). CBC stated that as of 2012, $73.9billion had had been deposited in Tax Free Savings Accounts (TFSA). As Nova Scotia often cites itself as representing 3 percent of the nation, one can assume our province has roughly $18 billion in RRSPs and $2.2 billion in TFSAs.

So how do we get a small portion of this invested in local firms that will help drive our local economy? Who are the private individual investors we can tap to invest in the firms here? Of course, I am talking about angel investors. Angels typically invest early, taking on a lot of risk in the process. This presents a challenge as we Atlantic Canadians tend to be a conservative lot and the idea of investing in early stage companies seems highly risky. It is.

So how can at least some of the risk be reduced or managed in order to attract more local angel investors? A couple of changes at the provincial and federal levels could go a long way to benefit our region and likely the entire country. At the provincial level, one of the answers is the Equity Tax Credits, or ETCs. An ETC is a provincial tax credit given to investors who invest in companies within that province. In NS the process to qualify as a company that can offer its investors an ETC is fairly straight forward.

Investors receive 35 percent of their investment back in the form of a provincial tax credit. It’s a great incentive because the investor gets to manage some of their risk by getting some money back at tax time. That said, there is a catch, two actually. 1. In NS the investor must reside in NS to qualify for the ETC; and 2. The maximum investment that qualifies is $50,000 annually. Compared to NB and PEI, which allows for tax credits on investments up to $250,000 and $100,000 respectively, we are considerably behind the pack in encouraging our investors to fund local companies.

For those who feel that the government shouldn’t reduce the risk of investments in companies via provincial tax credits I give you this. ETCs have been proven to result in more tax revenue at both a provincial and federal level. A 2010 study, commissioned by British Columbia’s Ministry of Small Business, Technology and Economic Development evaluated the economic impact of the venture capital program (VCP) in BC. BC’s VCP offered a 30 percent tax credit to investors making eligible investments. Over the period of 2001--‐2008, investments made in 517 companies received a total of $191million provincial and $65 million federal tax credits. These companies generated an estimated $379 million in provincial and $368 million in federal taxes. The estimates suggest that for every $1 of provincial tax credits issued, recipient companies generated $1.98 in provincial taxes; and for every $1 of Canadian (i.e., combined provincial and federal) tax credits issued, they generated $2.92 in Canadian taxes. In short, the BC multiplier was 1.98 and the Canadian tax multiplier was 2.92.

So the ETC appears to be a win for everyone. The company gets an investment, the angel gets a tax break to go with their investment and the government gets more tax dollars. So how do we increase its use?

Here are my recommendations (and neither of them are news, unless common sense is making news these days):

1. Increase the maximum qualifying amount of investment to $250,000. It’s a safe number and already being used by New Brunswick.

2. Allow people living outside the province to receive credit for the investment.

If a $100,000 investment for a local investor gets a $35,000 tax credit which then increases the province’s tax revenue to $70,000 (rounding up) it only makes sense that we replicate that math more often by casting a wider net. Does this mean an outsider gets a cheque from our government? Yes. The government should get two times their money back in the form of sales and income tax. Plenty of people are calling for regionalization but why restrict ourselves to one small region? Invite investors throughout the world to invest in our companies.

One other idea the province may want to consider is increasing the tax credit to 40 percent putting it on par with the tax credit most people receive from their RRSP investments. RRSP’s are safe investments but the return isn’t particularly high so perhaps we’d see more investments made locally with the extra incentive. The success of this type of offering can be easily tracked with a simple requirement that the companies that leverage it submit reporting on a quarterly basis with summary details of what they have paid in salaries (thus what has been paid in federal and provincial tax) and received in sales tax.

Speaking of RRSPs, remember that $18 billion in RRSPs and $2.2 billion in TFSA discussed earlier? That falls under federal jurisdiction. What if the federal government allowed investors to put even 5 percent of our portfolio towards higher risk, early stage local investments? We’d be able to funnel as much as $900 million and $110million respectively, into local firms. That’s more than $1 billion dollars based on current numbers. Again, too risky? The roughly 40 percent credit an investor receives for an RRSP contribution and the additional 35 percent ETC recoups approximately 75 percent of their investment immediately. Name one other investment that does that?

The good news is that there are companies already doing this and proving it to be effective. B4Checkin, a Nova Scotia-based company that developed an online hotel reservation system used it to raise their funding. I am an investor in this company. It wasn’t the tax credits that made my decision to invest but I invested a larger amount as a result of them. Martin MacKinnon, co‐founder and CFO of B4Checkin, credits the late Purdy Crawford with helping the company get this set up but it’s been hugely beneficial to the company’s investors with many of us participating in more than one round of investment.

If RRSPs are supposed to be self-directed, why can’t we invest them in the companies we want to? Is there a concern that people will begin taking advantage of less sophisticated investors, promising them Radian6 success as they pour their retirement money into the latest tech company? Probably and that’s why it’s important to restrict the amount of qualifying investment to a small percentage of their total portfolio. Restrict it further to friends and family of the company directors or accredited investors.

These rules are already in place but the relaxing of what qualifies as RRSP worthy could further spur investment in our local firms. At the end of the day the recipe for a successful ecosystem has a lot of ingredients. We need to be bold and do better to build a successful economy.

The items I discussed are but a few of the things needed albeit important ones. The key takeaways from this post are:

1. Tax credits are a no brainer: For every $1 of provincial tax credits issued, recipient companies generated $1.98 in provincial taxes. For every $1 of Canadian (i.e., combined provincial and federal) tax credits issued, they generated $2.92 in Canadian taxes.

2. Compared to NB and PEI, which allows for tax credits on investments up to $250,000 and $100,000 respectively, we are considerably behind the pack in encouraging our investors to fund local companies.

3. There are examples of early stage companies successfully using RRSP and ETC incentives to find investment.

Peter Hickey, @PeterGHickey, is a Co‐founder of Oris4. He would like to thank Martin MacKinnon, Co‐founder and CFO of B4Checkin, Halifax, and Emily Richardson, Co-Founder of  GoFullSteam, Halifax