Canada’s recent changes to its fiscal policy will further chill an already cooling innovation economy

The 2024 Federal Budget rolled out by the Government of Canada yesterday was disappointing, and needs to be reconsidered if we want Canada’s innovation ecosystem to thrive.

News of the budget dropped in the middle of the InnovateWest conference in Vancouver, where investors, entrepreneurs, and other stakeholders in the innovation ecosystem were gathered to discuss how we could make Canada more innovative and how we can foster more entrepreneurship in Canada. Details of the innovation-averse decisions embedded in the federal budget spread through the conference like wildfire, sucking the oxygen out of the room.

The federal government’s move to increase the capital gains inclusion rate from 50% to 66% punishes entrepreneurs and, importantly, employees of the startups and innovators who need to power the future of the Canadian economy. This tax increase makes Canada even less competitive relative to the US, which offers a much lower taxation rate of 20% on long-term capital gains, alongside the QSBS tax exemption, which allows entrepreneurs to avoid 100% of capital gains in startups.

In a post-covid world where companies can be founded anywhere more easily than ever before, Canada needs to be deliberately designing an environment that fosters innovation and entrepreneurship. Canada’s recent policy changes do the opposite.

The government positioned this as a tax increase on the wealthy, but this is not true. It is a tax increase for anyone who takes risks in the Canadian economy, not only founders but the hundreds of thousands of employees of innovative companies in Canada. People take jobs at these companies often for lower salaries than they would at “safer” companies in exchange for equity, for stock options that have the promise of delivering capital gains (and an associated lower tax rate) as an upside. This asymmetric reward (risk + capital investment = jobs and massive growth, when it works!) is what powers the economics of the innovation economy, and is ultimately what incentivizes Canadians to take risks.

These asymmetric rewards benefit the broader economy, and we should be doing everything we can to encourage more people to innovate, to take risks, to take a swing at creating Canada’s next Shopify or Clio. Instead, Canada’s recent changes to its fiscal policy will further chill an already cooling innovation economy. Canada has 100,000 fewer entrepreneurs than it did in the year 2000 and a productivity crisis that the Bank of Canada itself describes as “an emergency.”

We need entrepreneurship and innovation in Canada more than ever before, and Canada has the right to be the best and most innovative country in the world, with an incredible talent base, a strong education system, and the best quality of life standards.

We deserve a fiscal policy that supports, rather than hinders, that opportunity.

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