Home Venture Capital FURLONG: Capital gains tax hike a blow to venture capital

FURLONG: Capital gains tax hike a blow to venture capital

Chrystia Freeland, Justise Trudeau

Policy change might stunt economic growth for generations

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The decision of the Trudeau government to raise capital gains taxes will impact the economy negatively.

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For a government that says it is committed to improving economic growth, fostering innovation, improving productivity and creating jobs, this decision might just be the single most damaging policy change for Canadian entrepreneurs, stunting economic growth for generations.

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A previous Liberal government, in Budget 2000, underscored the importance of a tax system that fosters innovation and supports businesses, particularly in dynamic sectors like technology. At the time, Paul Martin, then the finance minister, noted that reducing the inclusion rate of capital gains was a way to better align taxation with the goals of promoting economic growth and facilitating access to capital.

“The high-technology sector and other fast-growing industries are particularly important to Canada’s future economic growth,” Martin said. “Our tax system must be conducive to innovation and must ensure that businesses have access to the capital they need in an economy that is becoming increasingly competitive and knowledge-based.

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“An examination of the taxation of capital gains in Canada suggests that this objective would be better achieved with a reduction in the inclusion rate of capital gains.”

Since then, the growth of Canada’s startup ecosystem has been exponential. The latest Scoring Tech Talent report by CRBE, a commercial real estate services firm, showed that Canada’s tech workforce grew by 15.7% (150,000 workers) between 2020 and 2022, faster than the United States growth rate of 11.4% (610,000 workers).


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In terms of regional impact, Vancouver saw a 69% increase in tech job growth, the highest among 50 North American cities surveyed, holding its position at number 8 on the list. Ottawa and Montreal climbed up the ranks to number 11 and number 12 respectively, and Toronto remains the go-to Canadian city at number 5 on the list, second only to the San Francisco Bay Area.

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The creation of Canadian jobs in venture capital-backed companies is also significant.

One source, the Work in Tech job board by Ontario-based business accelerator Communitech, shows that 98,104 jobs have been posted in Canada since 2017 by 1,418 companies. These jobs can be found across the country in our three hubs — Toronto, Montreal and Vancouver — but also in smaller cities, such as Calgary, Edmonton, Saskatoon, Quebec, Sherbrooke, Halifax and St. John’s. This sector is slowly diversifying Canada’s economy.

Venture capital has ebbed and flowed since 2000, reaching its highest point in 2021 at nearly $17 billion. It has since receded back to $6.9 billion, in line with a retrenchment seen around the globe as companies and investors adjust to higher interest rates and a number of geopolitical events impacting supply chains.

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The economic headwinds have also created a tough environment for attracting capital to this risky asset class. Simply put, now is the worst possible time to signal a lack of ambition in rewarding risk-taking.

We should not be surprised when Canada is yet again labelled risk-averse, despite the many budding hubs of entrepreneurship and hard-earned innovation successes backed by committed investors in recent years.

This policy would lead to a significant reduction in domestic capital, undermining the nation’s ability to retain existing entrepreneurs and attract new talent. Canada’s investors and entrepreneurs have the ambition to scale; this government just signalled that it does not.

In addition, higher capital gains tax leads to what is known as the “lock-in” effect, which creates an incentive for people to hold on to low-performing assets.

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Simply put, it leads investors and entrepreneurs to retain existing investments rather than selling them and investing in something new, such as an emerging business, just to avoid the capital gains tax. Capital gains taxes indeed influence individuals’ decisions regarding asset sales and investment choices.

While we know that policy decisions around taxation, particularly concerning capital gains, often involve balancing revenue needs with broader economic objectives, it is becoming undeniably clear that this government has not carefully considered the potential consequences of such tax changes — especially those that could impact investment incentives and entrepreneurial activity.

It’s not too late to change course and continue the remarkable progress Canada has made in future-proofing the economy. We urge the government to reverse the proposed changes to the capital gains tax.

Let’s maintain a tax system that supports innovation, attracts investment and nurtures growth, ensuring Canada remains a global leader in technology and entrepreneurship. We must keep Canada moving forward, not backward.

— Kim Furlong is Chief Executive Officer of the Canadian Venture Capital and Private Equity Association.

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