Creators of technology, whether financial services software, biotechnology, data analytics solutions or otherwise, know how extremely expensive those development costs can be.

Entrepreneurs and established corporations alike share the burden of having to find a constant flow of R&D investment to feed the hungry beast of innovation.

Recognising that technology innovators constantly search for new sources of financing, there may be a relatively untapped strategy to secure equity financing from Canadian investors, thanks to the Canada-Bermuda Tax Information Exchange Agreement.

When the TIEA came into force on July 1, 2011, it allowed both jurisdictions to share tax-related information with each other, and Bermuda was granted the status of “designated treaty country” by Canada.

That status means that a Bermuda company — across all sectors, not just technology — at least 10 per cent owned by a Canadian corporation and earning profits from an active business in Bermuda (“active income”), would be eligible to include those profits as “exempt” earnings. To the extent that dividends are paid out of exempt earnings, such dividends can generally be received by that Canadian investor without any Canadian tax being payable on such income.

Furthermore, certain types of passive income of the Bermuda affiliate may also, in some circumstances, be deemed to be active income pursuant to the TIEA and thus also included in the Bermuda company’s exempt earnings. As always, there are nuances to those rules that only specialised tax counsel in Canada can answer.

Generally, however, from a Canadian corporate investor’s perspective — such as a venture capital or private equity firm — as long as the active income of the Bermuda company is earned outside Canada and the Canadian investor owns more than 10 per cent of the equity (by both votes and value considered) in the Bermuda company, when those dividends are paid as its return on investment, they will be received on a tax-free basis by that Canadian investor. Otherwise, non-qualifying dividends would be subject to Canadian taxes of up to 26.5 per cent.

We believe that many potential equity investors in Canada who are active in the tech sector may not be fully apprised of the investor benefits to invest in Bermuda companies as a result of the TIEA.

The several financial advisory and accounting firms in Bermuda who have affiliated offices in Canada are an excellent resource to connect Canadian investors who may be interested in considering the TIEA benefits for investing with Bermuda technology companies.

Bermuda is a signatory to 41 tax information exchange agreements, and it is possible that some of those reciprocal jurisdictions are potential sources of investment capital that offer domestic incentives, of varying types, that encourage investing in Bermuda.

However, Canada’s qualified investor benefits born of the TIEA are well developed and are clearly designed to encourage and promote the flow of equity investment from Canada to Bermuda.

Enterprises that are developing technology in Bermuda and are looking for financing may wish to keep in mind all of those potential strategies to secure equity investment.

• Duncan Card is a partner at Appleby who specialises in IT and outsourcing contracts, privacy law and cybersecurity compliance in Bermuda. A copy of this column can be obtained on the Appleby website at www.applebyglobal.com. This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer.