Government’s Tax Proposal Threatens Canadian Innovation

Alshaar Ansari
Alshaar Ansari Politics News
7 Min Read
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In what can only be seen as a twisted joke, the Canadian government has put forward measures that could potentially destroy innovation across the country. Risk taking and entrepreneurship – the very backbone of our tech industry – have been hit hard by these proposals, which involve a rise in capital gains taxes at federal level. Little wonder investors are scared witless.

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Under new rules published in this year’s federal budget, businesses will pay income tax on two-thirds of their annual profits derived from capital gains, up from half at present. Similarly, individuals will face higher taxes on capital gains above $250,000. Ottawa expects to rake in an additional $19.4bn over five years as a result. But this is not just about numbers.

The Council of Canadian Innovators has written an open letter opposing the moves that is signed by more than 250 of the country’s leading tech companies and investment funds. “This budget is being understood as hostile towards the tech sector,” says Benjamin Bergen, president of the lobby group. “It shows a lack of understanding about how the innovation economy works — and it will set us back.”

The influence of these changes is expected to be felt across Canada’s economy as a whole. Kim Furlong, chief executive officer (CEO) of the Canadian Venture Capital and Private Equity Association warns many firms could be caught out while interest rates remain high with mergers, acquisitions and initial public offerings already slowing.

Trudeau Denounces His Government Once Again

“It directly impacts investors and entrepreneurs but it has ripple effects throughout the economy,” she says. Furlong also suggests risk-taking may become discouraged by this move.

Traditionally many workers within technology companies take on big risks early in their careers with often little reward other than hopes for future eventualities such as stock options or capital gains when their employer goes public. The government’s apparent attack on this value may result in many workers asking themselves if the risk is worth it.

Shopify president Harley Finkelstein chose some of the harshest words yet to condemn the changes, saying: “At a time when our country is facing critically low productivity and business investment, our political leaders are failing our country’s entrepreneurs.” Marie Chevrier Schwartz, founder and CEO at product sampling firm Sampler, called the budget measures “shortsighted” and asked: “How are we going to encourage innovation, job creation or strong economic performance if we’re not encouraging folks to dream?”

Our recent poll on the Scoop Canada YouTube Channel tackled the hot topic of whether Canada should lower it’s income tax rates to stimulate economic growth. The results were astonishing, almost every respondent voted in favor of the statement. Join the ongoing conversation on our Scoop Canada YouTube channel and cast your vote here to make your voice heard on this crucial issue!

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Source: Scoop Canada YouTube channel

The government says it will soften the blow of its tax hike by introducing a Canadian Entrepreneurs’ Incentive (CEI), which will allow entrepreneurs in certain industries to pay tax only on 33% of their capital gains. However industry sources say this does nothing for tech firms which have been excluded from qualifying sectors – only deepening feelings they have been betrayed.

According to Dan Kelly, the president of the Canadian Federation of Independent Business, most small-business owners will benefit or be unaffected by the capital-gains changes but he admits that they could discourage small firms from aggressively growing. David Shipley is CEO of the cybersecurity company Beauceron Security. He said that two years ago he probably would have sold his business instead of growing it if it had operated under those new conditions back then.

Venture capitalists have also criticized the government’s moves. Bruce Croxon co-founded Round 13 Capital, a prominent venture capital firm, which he called the new measures “demoralizing, depressing and dis-incentivizing,” adding that they will suppress investors’ risk appetite in Canada with a lower potential reward.

“It’s a global economy. We’re staring at the reality people will choose to place their money elsewhere,” lamented Croxon, whose words echo those of many others in the industry.

The worry extends past Canada’s borders as well. Jason Smith is CEO and founder of Vancouver-based software company Klue Labs Inc., who said these rules could drive Canadians towards starting their companies beyond our borders.

“Canadians teeter on edge on starting their companies in Canada or going to U.S.; every incremental tax makes us think twice about starting companies in Canada,” Smith said.

As bleak as it may sound when trying to defend its own actions, the government hasn’t been able to shape any cheerier narratives. In a report for law firm Osler Hoskin & Harcourt LLP, former Bank of Canada Governor Stephen Poloz says higher taxes will be required because healthcare costs more now; however his comment that “some will lament need raise tax” seems empty given all opposition from tech sector and entrepreneurs.

These changes to capital gains have overshadowed other technology and innovation-related announcements such as $2.4 billion commitment made recently by Ottawa towards supporting artificial intelligence industry – no further details were provided about how this will be implemented. $1.8 billion allocated over five years to three federal research councils; $600 million for Scientific Research and Experimental Development tax incentive program; $200 million for Venture Capital Catalyst Initiative, a government investment program appear like band-aids on deep and festering wound.

Why Canadians Want Justin Trudeau Out?

The Canadian government continues its tightening grip on innovation economy as the country’s entrepreneurial spirit hangs in the balance. Tech industry alarms are ringing through corridors of power, but the big question is: will the government listen or proceed anyway – sacrificing foundations of Canada’s economic prosperity?

Last Updated on by Alshaar Ansari

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