Canada can take great pride in being a global leader in the biotechnology sector. To maintain and foster our bio-economy, we need to continuously evaluate options that harness the development capacity of Canadian biotechnology companies. There have been recent proposals to expand to the biotechnology industry the fl ow-through shares program, which has long been an integral component of the capital markets for resource companies. These proposals suggest fl ow-through shares would offer excellent capital-raising opportunities for the sector, particularly for junior biotechnology companies, which, with the appropriate stimulus, will be key in fostering the sector’s sustained growth.
Flow-through shares allow companies to raise capital by harnessing the tax benefi ts of their high expenditures that would otherwise go untapped by renouncing them to investors who can, in turn, use them for their own benefi t. In essence, it makes the company raising money much more appealing to investors. Canada’s resource sectors have benefi ted greatly from the current fl owthrough share program, with Canada now recognized as the international leader in resource fi nancing with the highest number of resource companies per nation.1 Originally designed to address diffi culties junior resource companies face in fi nancing exploration, fl ow-through shares were extended to portions of the renewable energy sector in the 1990s. Much like resource and bio-energy companies, research and development expenditure requirements for biotechnology companies are high while revenues are often remote and unpredictable.
The biotechnology industry’s general proposal is to simply extend the availability of fl owthrough shares to biotechnology companies, with few adjustments other than those required to make the framework suitable to the realities of the biotechnology industry. Under the current system, both publicly traded and privately owned companies can issue fl ow-through shares, which must be common shares. Investors may choose between investing directly in only one publicly traded company or investing in an intermediary limited liability partnership that selects and manages a wider portfolio. Any corporation, trust, individual or member of a partnership that is a resident in Canada may claim a tax deduction for the fl ow-through of Canadian exploration expenses. To qualify as an eligible corporation, a company’s principal business and holding company’s principal assets must be in qualifying resource and bioenergy areas. To extend fl ow-through shares to biotechnology companies, the same rule would apply, with an eligible company needing to have its principal business or assets in the biotechnology sector.
Via a fl ow-through share agreement, eligible expenses are passed on to investors for tax purposes. As is currently the case under the fl ow-through share regime, which limits eligible development and exploration expenses to specifi c qualifying expenses that were undertaken in Canada, biotechnology companies would only be able to pass on to investors expenditures that were related to biotechnology research and development carried out in Canada. By using the current SR&ED eligibility criteria for qualifi ed expenditures, a fl ow-through share program would be administratively effi cient and cost-effective, as the Canada Revenue Agency already has the compliance infrastructure in place to evaluate eligible SR&ED expenses.
By their nature, biotechnology companies must take high-expenditure risks in their quest to create development. To stimulate continued growth in this robust Canadian sector, investors need to be provided with incentives that offset risks. Canadian companies have faced daunting challenges raising the capital they require; it is consistently their number one issue. Proponents argue the industry requires this sort of incentive. Advocates of extending fl owthrough shares to biotechnology companies recognize they face an uphill battle in convincing government that the benefi ts outweigh the costs, and are mindful of the effort that will be required to attract investors to the sector. Flow-through shares might offer a win-win situation to investors and biotechnology companies. Investors would receive attractive tax benefi ts in supporting the future of a leading industry, and junior biotechnology companies would have access to the capital they need to continue to build a vital bio-economy in Canada.