A 30-year veteran of Canada’s tech investment scene, John Ruffolo is the founder of Maverix Private Equity and co-founder of the Council of Canadian Innovators.
It’s fair to say that Canadians are not feeling a strong shared sense of economic prosperity right now. There’s plenty of fuel for discontent out there – a lack of economic opportunity, a sense that we’re falling behind globally, high grocery bills, the onerous costs of housing, and so on.
Our national economic engine has stalled. The underlying metrics are deeply troubling, especially Canada’s stagnating per-capita GDP. It was not much more than a month ago when Bank of Canada deputy governor Carolyn Rogers declared an “emergency” over our waning national productivity, particularly when compared with that of the surging United States.
What Canada desperately needs is growth and economic dynamism supported by long-term, strategic investments in innovation. Instead, what we have just been handed is a federal budget that risks making such investments less attractive. And it is this unintended consequence of a prominent part of the 2024 federal budget that worries me the most.
On budget day, Ottawa assured us that the proposed change to the capital gains exclusion rate would only affect a tiny fraction of Canadians – 0.13 per cent of taxpayers. In the past couple of weeks, it is more and more clear that this is simply not true.
Instead, it is increasingly apparent that this tax hike will hit farmers and fishermen, dentists and doctors, entrepreneurs and the highly skilled young workers who propel Canada’s innovation economy.
Just when our priority needs to be supporting Canadian entrepreneurs trying to scale up innovative ideas that can translate into higher Canadian economic productivity, we’re moving in the opposite direction. Instead, we’re looking at a tax increase with possible knock-on effects that could be deeply adversarial to the interests of our entrepreneurs and our innovation sector.
The fact is that this capital gains tax hike potentially hits anyone who decides to start their own business – or who chooses to invests in the future success of someone else’s firm.
Since the budget was announced in April, I’ve had countless conversations about this capital gains tax change. In Canada’s tech community, the concern is widespread, and we’ve seen the extent of it with more than 1,900 tech leaders and individuals signing an open letter drafted by the Council of Canadian Innovators.
Part of this tech sector angst has to do with the tax hike’s likely impact on employee stock options. When people hear the phrase “stock options,” they often think about Bay Street executives, but that isn’t the whole story. Options are an important tool for startups across Canada to attract the highly skilled and ambitious talent that can help propel a nascent business.
But it isn’t just people in tech who are watching this capital gains tax increase, however. I’ve also heard from observers who are looking to Canada’s tech sector to produce innovative ideas that can help our more established and mature companies digitize and optimize their existing operations and processes.
But how are we supposed to make our economy more productive and expand Canada’s GDP when we’re taxing exactly the sort of innovation and investment that we need?
Let me express this idea another way, based on my decades of investing in Canadian innovation: Increasing taxes on capital decreases availability of capital. Period. And that’s whether it is from Canada’s angel investors, venture capitalists, private equity/growth equity fund managers or family offices. Increasing taxes increases the cost of capital thereby also making alternative investments more attractive whether by asset class or geography.
Decreased access to capital decreases the success rate of innovative companies. Period.
Decreased success of innovative companies decreases the success of efforts to increase our productivity. Period.
And declining productivity means a poorer Canada, where we have to subdivide our shrinking remaining wealth and quarrel over the crumbs left on the plate.
We need to work together to increase the size of the national economic pie, so that there’s more to go around through our social programs and all they add to Canadians’ quality of life, and our sense of ourselves as a nation.
The most frustrating thing about the 2024 federal budget is that it actually contained a lot of promising ideas for how to drive growth and innovation. The government is ready to spend billions to support further advances in artificial intelligence. There’s money to enhance the scientific research and experimental development tax credit. There’s talk about reforming government procurement, so that innovators can more easily sell their technology to the public sector.
These are all good ideas that, if followed, will help position us for success and sustained growth.
But all of those ideas rely on investment, entrepreneurship and productivity-boosting innovation. And if the driving message coming out of this budget is that the government is hiking taxes and going after those risk-takers who want to scale up a great idea or innovative concept, then we’ll all be poorer for it.