The Liberal government’s 2024 federal budget has sent shockwaves through Canada’s tech sector, with sweeping increases to capital gains taxes being the main cause for concern.
Leaders within the industry are voicing criticism at the Liberals, suggesting that further taxation could drive businesses and talent south of the border.
The budget, delivered by Finance Minister Chrystia Freeland, raises the inclusion rate for capital gains tax from 50% to 66% for individuals on amounts exceeding $250,000. The amendments to the Income Tax Act will come into effect on June 25, 2024.
The Liberals expect to make $19.4 billion over the next five years from raising the capital gains tax.
Benjamin Bergen, president of the Council of Canadian Innovators, explained in his organization’s response to the budget that the best way for the government to boost its revenue is to drive economic growth and productivity gains by helping Canada’s innovators.
“We hope that Minister Freeland and the Liberal government will listen to innovators and adjust this proposed tax hike before they do irreparable harm to the Canadian innovation economy,” he said.
If they do not, it may be too late, warned Bergen.
“At some point before too long, Canadians will go to the polls and judge this government not on its good intentions and future announcements. We will judge this government on the actual results they have driven for the Canadian economy,” he concluded.
Canada’s tech sector, as well as innovation and entrepreneurship, has more issues with the budget than just capital gains tax.
Local entrepreneur Boris Wertz noted the reasons he felt that the Liberals had “lost their plot on innovation and entrepreneurship.”
His biggest concerns were “trying to pick winners (e.g. superclusters); proposing very rigid AI regulations; dramatic increase of number of public sector employees; (and) increasing capital gain rate.”
The budget promises to invest $2.4 billion in AI support, $5.1 million of which will be dedicated toward the Artificial Intelligence and Data Act — ensuring that AI is “safe and non-discriminatory,” according to the Liberal government.
Bergen’s concerns echoed far and wide across the tech sector.
Kim Furlong, CEO of the Canadian Venture Capital and Private Equity Association, said that her organization is “baffled” by the Liberals’ decision to increase the capital gains tax.
“This measure, which effectively taxes innovation and risk-taking, will significantly dampen Canada’s entrepreneurial spirit, stifle economic growth in critical sectors of our economy, and impact job creation. Such policy change undermines Canada’s position to attract the talent needed to grow and scale companies here,” she said. “CVCA will work tirelessly to reverse this decision,” said Furlong.
The founder of a venture capital firm, Christian Lassonde, said that Canada is desperate for new investment dollars.
“What does this government do? Punish investing. You can’t make this stuff up,” he wrote in a post to X.
President and CEO of the Canadian Federation of Independent Business, Dan Kelly, said that the capital gains tax changes will demotivate Canadians from starting businesses in the first place.
“Several sectors of Canada’s (small and medium enterprises) community will be hit with higher capital gain taxes on business sales above $2.25 million, including restaurants, hotels, doctors’ offices, insurance brokers, real estate firms, recreation and arts and recreation firms,” said Kelly in a post to X.
Armon Shokravi, co-founder of a software development business, explained in a post to X that the tax changes, of an inclusion rate from 50 to 66%, would increase the net capital gains tax from 27% to 36%, compared to the United States, who have a tax rate of 20%.
“In my conversations with Canadian entrepreneurs, it’s clear: They’re feeling less motivated to build businesses here when moving just a bit south could mean saving a lot more,” he said.
The president of Shopify, Harley Finkelstein, expressed his disbelief at Canada’s decision.
A respondent to his post explained that the United States has federal and state capital gains taxes, making it less of a gap than people are saying.
However, Finkelstein said, “It was quite literally the only thing that made us competitive on that front.”
Another X user defended Finkelstein, explaining that Florida and Texas don’t have state capital gain taxes, which is where many businesses have been moving.
Independent MP Kevin Vuong shared a text message from a local business owner.
The former founder, who works in the tech sector, said that they and their partner sat down last night and began the process of moving to the United States.
“We’re leaving to a country that celebrates entrepreneurs and innovation,” they said. “The world is too competitive for talent and Canada is not competitive anymore.”
