Use the Lexology Navigator tool to compare the answers in this article with those from 20+ other jurisdictions.
Financing, investment and government support
Does the government provide any incentives or support programmes to promote fintech innovation in your jurisdiction (eg, tax incentives, grants and regulatory sandboxes)?
In 2017, the Canadian Securities Administrators (CSA) launched a regulatory sandbox initiative that supports businesses seeking to offer innovative products, services and applications. The sandbox is open to business models that are innovative and provide qualifying businesses with relief from regulatory requirements, allowing them to test their products and services in the Canadian market. Examples of the types of business that are eligible to participate in the sandbox include:
- online platforms (eg, crowdfunding portals, online lenders, angel investor networks and other technological innovations for securities trading and advising);
- businesses using artificial intelligence for trades or recommendations;
- cryptocurrency or distributed ledger technology-based ventures; and
- technology service providers to the securities industry (eg, non-client facing risk and compliance support services).
Firms that have benefited from the sandbox to date include:
- investment fund managers for cryptocurrency investment funds;
- issuers in respect of initial coin offerings; and
- an online platform facilitating venture capital and angel investing.
Individual provincial and territorial securities regulators or regulatory authorities in Canada have also established various advisory committees which support fintech innovation. For example, the Ontario Securities Commission (OSC) has established a fintech advisory committee, including representatives from the fintech industry, to advise it on developments in the fintech space as well as the unique challenges faced by fintech businesses in the securities industry. It has also established the OSC LaunchPad, which is essentially the Ontario version of the CSA regulatory sandbox.
Other provincial regulators have undertaken similar initiatives. For example, the British Columbia Securities Commission has set up a dedicated tech team to answer questions regarding regulatory issues relating to fintech businesses, while Quebec’s Autorité des marchés financiers has created a fintech working group to analyse technological innovations in the financial sector and anticipate the issues they will raise for consumers and regulators. Like the OSC LaunchPad, the British Columbia and Quebec initiatives have recently sponsored hackathons.
In November 2017 the Ontario government also announced its intention to create a regulatory super sandbox to provide a framework within which fintech business models and products could experiment, along with the launch of an agency known as the Ontario FinTech Accelerator Office to assist start-ups.
Tax incentives are also available in some cases. At the federal level, qualifying corporations can claim a tax credit based on eligible scientific research and experimental development (SRED) expenditures. The federal credit is up to 35% for Canadian controlled private corporations (CCPCs, as defined in Canadian tax law) and 15% for other corporations and is only refundable for certain CCPCs.
Quebec has two tax incentives that are attractive for fintech businesses:
- R&D tax credits – these credits allow a company to claim a tax credit based on its R&D expenses. The Quebec credit is 30% for CCPCs and 14% for other corporations and is refundable (ie, if the company is not liable to pay taxes, the credit is refunded to the company, thereby financing a portion of the R&D costs). Credit limitations and conditions to apply.
- E-business tax credit – this credit is a 30% credit on eligible salaries paid for IT development. A portion of the credit is refundable (24%), the balance (6%) is non-refundable. If the e-business credit is claimed for an eligible salary, the same salary is ineligible for the R&D credit.
In Ontario, qualifying corporations can claim a non-refundable 3.5% tax credit on eligible SRED expenditures. An innovation tax credit is also available to qualifying corporations, allowing them to claim a refundable 8% tax credit based on eligible SRED expenditures. If the corporation exceeds certain thresholds, the credit is phased out and eliminated. While both credits can be claimed, the amount of eligible expenditures on which a credit can be claimed will be reduced by the amount of the other credit.
In British Columbia, qualifying corporations can claim a 10% tax credit based on eligible SRED expenditures. The credit is refundable for certain CCPCs. If the CCPC exceeds certain thresholds, or if the corporation is not a CCPC, the credit is non-refundable.
Certain other industry-specific tax credits are available, depending on the circumstances.
Has the government concluded any international cooperation agreements to promote and facilitate the cross-border expansion of fintech businesses?
A number of Canadian securities regulators have entered into international fintech cooperation agreements with:
- Australia’s Securities and Investments Commission (2018);
- France’s Autorité des marchés financiers (2017 and 2018);
- the Financial Services Regulatory Authority of Abu Dhabi (2017); and
- the UK Financial Conduct Authority (2017).
These agreements generally have the dual purpose of sharing lessons learned from fintech regulation initiatives while creating mutual referral processes that enable innovative fintech businesses to enter new markets.
Financing and investment
What private financing and investment schemes are available and commonly used for fintech start-ups in your jurisdiction?
Fintech start-ups in Canada generally benefit from the same type of financing and investment schemes as other start-ups. Canada has a strong venture capital market and many funds dedicated to fintech. In addition to private placements, some of Canada’s smaller stock exchanges have been important vehicles for fintech companies looking to raise capital – for example, the use of reverse takeovers using the Toronto Stock Exchange Venture Exchange’s capital pool company programme has become common for many companies.
Click here to view the full article.