A web of counter-productive tax rules blocks the flow of needed foreign cash to Canada’s private equity sector, according to a new report from the C.D. Howe Institute.

In the report, authors Stephen Hurwitz and Louis Marett argue these rules needlessly, and unprofitably for Canada, block hundreds of millions of dollars in foreign (mostly U.S.) investment capital.

Canada’s private equity firms are not as well capitalized as their U.S. competitors, and invest less, in turn, in promising Canadian companies. Canadian venture-backed companies have only one-third the capital of their U.S. competitors in the North American marketplace.

The authors say Canada needs to change tax laws to unblock the needed flow of capital. The report makes three recommendations.

First, the federal government should end the tax-clearance process that foreign private equity investors must follow when selling shares of a private Canadian company.

Second, to prevent double-taxation, the Canada-U.S. tax treaty needs amending to provide U.S. limited liability companies the same tax treatment that ordinary U.S. corporations receive when selling shares of a private Canadian company.

Third, the federal government should permit tax-free rollover of shares of a Canadian company into shares of a foreign company.