Written By Marshall Eidinger and Lisa Kakoske
The Canadian government has announced new measures in its 2024 Fall Economic Statement to facilitate increased pension fund investment in the country’s venture capital (VC) sector. This includes a commitment of $1 billion to recapitalize the Venture Capital Catalyst Initiative (VCCI 2025) and a further $1 billion to support mid-cap growth companies.
The government is also proposing new enhancements to the Scientific Research and Experimental Development (SR&ED) program to target high-growth companies.
VCCI 2025
Based on its past performance and with a focus on increasing the participation of pension funds and other institutional investors, VCCI 2025 is expected to make a significant impact on the Canadian venture capital ecosystem. Pension funds and other institutional investors will be expected to deploy a significant amount of their own capital in addition to any VCCI funding received.
The Fall Economic Statement proposes:
- To launch the fourth round of the VCCI with $1 billion in funding in 2025-26, on a cash basis. The government says to leverage more private venture capital, this round will include more enticing terms for pension funds and other institutional investors.
- To provide up to an aggregate of $1 billion, on a cash basis, to invest in mid-cap growth companies. These investments will be made by a qualified fund manager with a proven and demonstrable track record of supporting capital to Canadian mid-cap growth companies. The government’s investment will be structured to be concessional and equal to 25 percent of net new private investments in order to crowd in additional private capital into the growth equity market.
The federal government invites qualified fund managers, including Canadian pension funds, to respond to the forthcoming Call for Expressions of Interest to become selected managers. Selected fund managers will be expected to join as significant co-investors, with their own capital.
History and Impact of VCCI
The VCCI was introduced by the federal government in Budget 2017 with a commitment to invest $371 million. Through its initial commitment to VCCI, the government invested through three streams focusing on large, private sector-led funds-of-funds (HarbourVest Partners, Kensington Capital Partners, Northleaf Capital Partners, and Teralys Capital), fund managers with diverse fund management teams, new models or that were located in emerging regions (Brightspark, Build Ventures, Garage Capital, Highline Beta, and TandemLaunch) and funds with a focus primarily in the clean technology sectors (ArcTern Ventures, Cycle Capital, and renewal funds).1
As a result of the federal government’s investment under VCCI 2017, significant investments were made into the Canadian venture capital sector. As of December 2022, the four funds-of-funds who were recipients of VCCI 2017 funding raised $1.176 billion, including $840 million from private investors. 46 Canadian venture capital funds received $854 million in investment commitments and VC funds that received support from VCCI invested a combined $1.7 billion from all investment sources in at least 322 Canadian companies.2
The federal government invested an additional $450 million in VCCI in 2021 providing $350 million to the same funds-of-funds who received 2017 VCCI funding, $50 million to funds investing primarily in the life sciences sectors (AllosteRx Capital-CCRM, Amplitude Ventures, CTI Life Sciences Fund, Genesys Capital, Pender Ventures and Sectoral Asset Management) and $50 million to diverse fund managers and underrepresented Canadian entrepreneurs (BKR Capital, District Ventures, Ripple Ventures, Sandpiper Ventures, The51, Amplify Capital, Pender Ventures, Raven Indigenous Capital Partners, StandUp Ventures and TandemLaunch Ventures).3 The impact of VCCI 2021 is not yet clear as much of that capital is still being deployed, however, the deployment of capital invested by the federal government in VCCI 2021 and VCCI 2025 will likely have a profound effect on the venture capital industry in Canada.
SR&ED Tax Incentives
The Fall Economic Statement proposes the following new enhancements to the SR&ED program, effective on or after December 16, 2024:
- Increasing the annual expenditure limit on which Canadian-controlled private corporations are entitled to earn an enhanced 35 percent investment tax credit, from $3 million to $4.5 million.
- Increasing the prior-year taxable capital phase-out thresholds for the enhanced credit from $10 million and $50 million to $15 million and $75 million, respectively.
- Extending the enhanced refundable SR&ED credit to Canadian public corporations.
The Fall Economic Statement also proposes to restore the eligibility of capital expenditures for both the deduction against income and the investment tax credit components of the SR&ED program, effective for property acquired on or after December 16, 2024.
Further details on changes to the SR&ED program are to be announced in the 2025 federal budget.
Bennett Jones also looks at the government’s announcement that it intends to remove the “30 percent rule” for investments by domestic pension funds in Canadian entities in a separate update on the Fall Economic Statement, Federal Government Proposes Changes to 30 Percent Rule to Spur Pension Investment Within Canada.
To discuss what the funding to the VCCI or changes to the SR&ED program could mean for your organization, please contact Marshall Eidinger or Lisa Kakoske.
Please note that this publication presents an overview of notable legal trends and related updates. It is intended for informational purposes and not as a replacement for detailed legal advice. If you need guidance tailored to your specific circumstances, please contact one of the authors to explore how we can help you navigate your legal needs.
For permission to republish this or any other publication, contact Amrita Kochhar at kochhara@bennettjones.com.
Bennett Jones