Finance Minister Chrystia Freeland presents the federal budget in the House of Commons in Ottawa on April 16, as Prime Minister Justin Trudeau (right) looks on.Adrian Wilde/Canadian Press
Ottawa’s capital gains tax hike will have a chilling effect on the innovation economy, discouraging investment and risk-taking, technology industry leaders said after this week’s federal budget release.
They said the changes could discourage venture funding by discouraging founders and technology players from establishing companies in Canada and reducing returns for investors.
“The technology industry is hostile to this budget,” Benjamin Bergen, president of the Canadian Council of Innovators, a technology industry group, said in an interview. “This shows a fundamental misunderstanding of how the innovation economy works. Ultimately, it will set our country back.” The group said Wednesday night that Canada’s most prominent It published an open letter expressing opposition to the measure, signed by more than 150 people from some of the largest tech companies and investment funds.
Under the proposed changes announced in Tuesday’s Budget, companies would pay income tax on one-half to two-thirds of their capital gains profits each year. The same increase applies to individuals, but only for capital gains over $250,000. The government announced that these measures, which will take effect from June 25, 2024, will add $19.4 billion to the national exchequer over five years.
This movement is It affects people who sell assets for profit, such as those who sell a business, convert stock options to common stock, or take a business public.
Kim Furlong, CEO of the Venture Capital and Private Equity Association of Canada, said the budget measures come at “the worst possible time.” He noted that interest rates remain high and mergers, acquisitions and initial public offerings (IPOs) have slowed.
“The impact on investors and entrepreneurs is direct, but the impact is rippled throughout the economy. This is a strong indication that risk-taking is not encouraged,” she said.
Many engineers working in early-stage startups take risks for the potential for future rewards, such as capital gains when the company goes public. Targeting this value could send a message that the risk may not be worth it, Bergen said.
Tech executives took to social media to express their disapproval of the new measures.
“Our political leaders are failing our nation’s entrepreneurs as our nation faces severely low productivity and business investment,” Shopify President Harley Finkelstein wrote. In the post of X.
Marie Chevrier Schwartz, founder and CEO of product sampling company Sampler, said in a LinkedIn post that the budget measure is short-sighted. “If we don’t encourage people to dream, how do we foster innovation, job creation, or strong economic performance?” she wrote.
Capital gains tax changes in budget divide the small business world
Tuesday’s budget also includes several measures clearly aimed at cushioning the impact of tax increases. Ottawa introduced the Canadian Entrepreneurship Incentive. This reduces the taxable portion of capital gains for entrepreneurs in certain industries to 33% on lifetime gains of up to $2 million. Included in eligible income. The technology sector is not on the list of industries not eligible for the cuts.
This is on top of the existing system in which the government increased the lifetime capital gains exemption on the sale of a small business from $1 million to $1.25 million, allowing some entrepreneurs to sell their entire company or sell at least He will receive a $3.25 million exemption. Part of the business.
Dan Kelly, president of the Canadian Federation of Independent Business, said that while most small business owners will be ahead of the curve or remain unaffected by the capital gains changes, this measure will encourage small businesses to aggressively pursue growth. He said it could be a hindrance.
David Shipley, chief executive of cybersecurity firm Beauceron Security, said he likely would have sold the business two years ago instead of growing it had the new conditions been in place at the time. Ta.
Mr. Shipley took issue with one particular requirement for claiming the Canadian Entrepreneurial Incentive. That is, the founder of a company must own at least his 10% of the shares in his business. He said ownership issues should be outside the government’s control.
Bruce Croxon, co-founder of venture capital firm Round 13 Capital, said the new measures were “demoralizing, demoralizing and demotivating.” He added that investors are discouraged from taking risks in Canada given the lower potential rewards.
“It’s a global economy. We’re faced with the reality that people choose to invest their money elsewhere,” he said.
Jason Smith, founder and CEO of Vancouver software company Crew Labs, warned that the measure could encourage Canadians to set up companies outside of Canada.
“Canadians are torn between starting a company in Canada or going to the United States,” he says. “Every tax increase makes me think twice about setting up a company in Canada.”
Some defended raising capital gains taxes. Former Bank of Canada Governor Stephen Poloz said in a report from law firm Osler, Hoskin & Harcourt that tax increases will be needed to cover increased health and military spending.
“Some may bemoan the need for tax increases because they will undoubtedly hurt economic growth and productivity. But this government is making some permanent changes that will forever cost money,” Poloz said. he said. “Other routes are not fiscally responsible.”
The capital gains changes overshadowed other technology and innovation-related announcements.
The government recently announced $2.4 billion to support the artificial intelligence industry, but gave no details on how that would be rolled out.
The budget also allocated $1.8 billion over five years to three federal research councils, $600 million for scientific research and experimental development tax incentive programs, and $200 million for venture capital catalyst initiatives. Government investment programs.
