Communitech, MaRS Discovery District and Invest Ottawa won’t join a campaign to press federal government to reverse a proposed capital-gains tax hike.Deborah Baic/The Globe and Mail
Three of Canada’s leading regional innovation support agencies won’t join a campaign to press Ottawa to reverse a proposed capital-gains tax hike, despite widespread opposition by the startups they support and other technology entrepreneurs.
Communitech, MaRS Discovery District and Invest Ottawa are instead trying to convince Finance Minister Chrystia Freeland to harmonize a new proposed tax break for Canadian small business owners called the Canadian Entrepreneurs’ Incentive with a similar but more generous tax break in the United States. Ms. Freeland has expressed willingness privately to representatives of the innovation community to tweak the incentive or look at other founder-friendly changes, three sources familiar with the discussions said. But she has stood firm on the capital-gains tax hike. The Globe and Mail is not identifying the sources because they are not authorized to discuss the matter.
The position of the three agencies, which draw much of their funding from the federal government, has drawn a rebuke from the Council of Canadian Innovators (CCI), which represents domestic technology companies. The group is leading opposition efforts against the capital-gains tax move and is loath to have that message diluted by organizations that have to answer in part to governments who help finance them.
“We have to show a united front on why this is an issue and what this means not only for the technology ecosystem but the entire Canadian economy,” said CCI president Benjamin Bergen. “People are rightly angry, but the way it’s being framed by the government is intentional and designed to try to divide Canadians. What I don’t want to see happen is for the regional economic hubs to come out and not listen to what the technology community has said.”
The federal budget, tabled April 16, proposed to increase the taxable portion of capital gains to two-thirds from 50 per cent for corporations and trusts, and to make a similar increase for individuals for capital gains of more than $250,000 a year. The new rules are set to come into effect June 25. The government has positioned the move, which it forecasts will generate $19.4-billion in revenue over five years, as part of “tax fairness” plan that would see wealthier people pay more to fund its spending promises.
The budget proposed mitigating benefits for small business owners and entrepreneurs, including raising the lifetime capital-gains exemption to $1.25-million from $1.02-million and introducing the Canadian Entrepreneurs’ Incentive, which will allow qualified founders to pay less tax on up to $2-million of lifetime capital gains. But the incentive only applies to founders in certain industries who own at least 10 per cent of their companies; many tech entrepreneurs typically end up with less after raising venture capital.
The proposed capital-gains hike has enraged many tech entrepreneurs and investors. The hike will dampen profits for those selling businesses or converting stock options and disincentivize Canadian startups and their backers at a time when productivity is dropping, critics say. And while the budget stated that just 0.13 per cent of Canadians would pay more income tax “in any given year,” it did not project how many would be affected their lifetimes.
The capital-gains proposal has become the most contested element of the budget. As of Friday, more than 1,900 Canadian tech CEOs, financiers and other leaders had signed an open letter published by the Council of Canadian Innovators opposing the move. Others have come out against the measure including cottage owners, doctors, several economists and former Liberal finance minister Bill Morneau. They say it will hurt, not help, a country that has been dogged by economic stagnation.
That message also came through in a postbudget survey of 130 tech CEOs and founders conducted jointly by MaRS, which is based in Toronto, Kitchener, Ont.-based Communitech and Invest Ottawa. According to preliminary results shared with The Globe and Mail, four in five said the capital-gains tax increase would either harm job creation and talent recruitment or deter innovation and investment. Just 8.4 per cent agreed the move was fair. Eighty per cent said the negative effects of the capital-gains change overshadowed the budget’s positive tech-related measures. A majority said the budget left them with a less favourable view of Canada as a place to build a tech company.
Nevertheless, MaRS CEO Alison Nankivell made no specific mention of the capital-gains increase in her one public comment about the budget. Communitech CEO Chris Albinson posted a statement supporting the budget that likewise made no mention of capital gains. That did not sit well with some local entrepreneurs. “When a statement comes out and says nothing about a capital-gains issue that their constituents have been very vocal about, my concern is that provides air cover for bad policy,” said Kurtis McBride, CEO of Kitchener-based Miovision Technologies Inc.
On Monday, Mr. Albinson sent a letter to Ms. Freeland with one recommendation: harmonizing the Canadian Entrepreneurs’ Incentive with a U.S. tax break called the Qualified Small Business Stock exclusion. The U.S. measure offers a US$10-million lifetime capital-gains exemption and sets no ownership threshold, unlike the Canadian incentive. Mr. Albinson did not respond to several interview requests.
The CCI’s Mr. Bergen said that in a meeting this week with top executives from the three agencies he was told they wouldn’t join the campaign nor recommend to government that it repeal the capital-gains tax hike, but instead would press on the idea of harmonizing the Canadian and U.S. incentives, saying the agencies’ mandates are to serve founders.
While the CCI would favour such a move, Mr. Bergen said the primary focus should be on reversing the capital-gains tax increase, which will have a broader impact. “If government-funded organizations want to try to provide a win for the government in this space, it would be detrimental to the long-term health of our ecosystem.”
When asked if MaRS agreed the capital-gains change should be reversed, spokeswoman Wendy Bairos said the survey revealed “diverse priorities beyond capital gains, emphasizing the varied needs of our entrepreneurial community” and confirmed the three agencies are pressing for alignment on the incentives, “amongst other suggestions.” She declined to say what the other suggestions were.
Sean Silcoff