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As the federal government unveils a substantial wage subsidy to prevent layoffs amid the COVID-19 outbreak, startups that have large Canadian teams but that are incorporated in the U.S. are worried they won’t qualify for the program.
Prime Minister Justin Trudeau offered more detail Monday about Ottawa’s evolving business aid package, which now includes a plan to pay 75 per cent of workers’ salaries for companies that have lost 30 per cent of their revenue because of the pandemic. But when the program was first announced, it was limited to Canadian-controlled firms, potentially excluding those whose corporate structures span the U.S.-Canada border.
Talking Point
Startups that employ large Canadian teams but that are incorporated in the U.S. are concerned they’ll be excluded from Ottawa’s expanded wage subsidy. The program’s original criteria, which have yet to be fully updated, restrict eligibility to domestically controlled companies. However, executives at cross-border firms say they contribute significantly to tech-sector employment and growth in Canada.
“We’ve been employing Canadian people in the Canadian tech sector, and … a lot of companies like ours are a huge contributor to the Canadian tech ecosystem,” said Fiona Lake Waslander, COO of Skylight, a software-enabled home-renovation company. The firm is incorporated in Delaware and U.S. investors provided its US$14 million in venture capital funding. But all four co-founders are Canadian, and 50 of its 70-plus employees are based in Ontario. “The talent was here,” said Lake Waslander. “It makes total sense from a cost perspective.”
Skylight currently only operates in the Bay Area, which went into lockdown in mid-March. “We’re now at revenue zero,” said Lake Waslander, adding that the firm doesn’t know when it will be able to resume construction. “It will be very hard to maintain our team.”
Derek Ball, CEO of atVenu, a point-of-sale and commerce platform for live events, is similarly concerned about holding onto the firm’s 28 Canada-based workers among its 36 total employees. “Our entire product team is in Calgary,” he said. The firm is also Delaware-incorporated, but two of its three co-founders and major investor Real Ventures are Canadian. Social-distancing measures in response to the outbreak have hit atVenu’s revenues, Ball said. “We only make money when artists are playing concerts and festivals.”
The company will use forgivable loan programs in the U.S. to cover employees’ salaries there, Ball said. “But there is a real risk of potential layoffs in Canada if we don’t come up with some strategy for how we’re going to keep paying people with no revenue.”
Finance Canada did not answer a question from The Logic about whether employers that are not Canadian-controlled or headquartered in Canada, but have staff here, will be eligible for the subsidy. More information on the program will be “available soon,” said spokesperson Marie-France Faucher. On Monday, Trudeau said Finance Minister Bill Morneau and Small Business Minister Mary Ng would provide details Tuesday.
But Lake Waslander and Ball are concerned their Canadian employees won’t qualify for the subsidy, given the restrictions announced as part of the initial aid package. “Without more information, our assumption is the same criteria will apply,” said Ball.
Ottawa has already made some changes to the measure, including increasing the wage subsidy from 10 per cent to 75 per cent and expanding its focus from small businesses to firms of any size. Trudeau also said Monday the subsidy will apply to the first $58,700 of workers’ annual wages. “That amount is well below the salaries of most people in the tech sector,” said Ball, estimating the subsidy is worth closer to 40 per cent than 75 per cent for such workers, although “any help is welcome help.”
Faire, a marketplace where independent retailers can order artisanal goods wholesale, has reassigned some of its customer support team to help users identify opportunities to tap into government aid. “We saw a huge decrease in our business,” said CTO Marcelo Cortes, in part because the company has encouraged stores to buy less so they don’t end up with unsold inventory; it declined to disclose specific revenue figures.
The San Francisco-based firm also set up a headquarters in Kitchener, Ont. at its founding, where about 80 of its 230-plus employees work, including Cortes. The company has raised US$266 million in venture capital funding so far, and has gamed out four possible scenarios for the COVID-19 outbreak, but even in the worst case—businesses shut for six months—it doesn’t plan any layoffs.
Faire hasn’t yet looked into government support for itself, but Cortes said firms with its dual U.S.-Canadian structure shouldn’t be excluded from programs. “We are very well funded, but there are many other companies and startups that are in [a] similar situation, and they [like Faire] also employ people in Canada,” he said. “All these people are contributing to the economy, so I don’t see why this shouldn’t apply to us, at least to the fraction of the business that happens in Canada.”
Other federal programs, such as the small-business tax deduction, are limited to Canadian-controlled firms, while the scientific research and experimental development (SR&ED) incentive offers better benefits to such firms. Ball said the wage subsidy could take a similar approach to SR&ED, with “different tiers.” For example, the measure could be forgivable for Canadian-controlled companies, but convert to “a low-interest loan” for firms like his.
“There’s Canadian tax dollars that are being put to work here to potentially benefit a company which is based in Delaware,” Ball acknowledged. But he said such firms need to be included if the government’s objective is to ensure Canadian workers keep their jobs.
Were Ottawa to open the program to cross-border startups, it would have to consider whether it would tailor the criteria to exclude larger firms that have lost substantial revenue in the pandemic, such as oil and gas giants or auto manufacturers.
But Lake Waslander said governments are sending a “mixed message” by denying aid to firms like Skylight after establishing agencies to encourage foreign firms to set up local divisions and hire here. “It is frustrating that other companies that look and act very much like us, [but] have Canadian venture capital backing, are going to get this big wage subsidy,” she said. “It leaves us in a pretty uncomfortable financial situation.”
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