Yahoo Finance Capital gains tax changes could fuel a startup exodus, leaders say
Feedback from Canadian tech startup founders about the federal government’s 2024 budget suggests the capital gains tax changes in particular could trigger an exodus of companies and leadership.
Nearly 45 per cent of startup leaders who responded to a post-budget survey by regional innovation hubs MaRS Discovery District, Communitech and Invest Ottawa say the capital gains tax changes have led them to consider relocation outside the country.
“After 11 years of very hard work … I'm done with being treated like a greedy bastard instead of a creator of high-paying jobs,” one company leader replied.
The innovation hubs reached out to members following the budget and received more than 150 responses, the vast majority of them from founders, CEOs and presidents of companies in early to mid stages of scaling up.
The budget, announced in April, aims to boost the tax rate for capital gains for corporations, trusts and individuals from one-half to two-thirds, and has been particularly controversial in the business sector. (For individuals, the tax would apply only on gains of more than $250,000). The measure also comes as some economists point to worrying signs about productivity and innovation in the country.
In a statement connected to the survey, MaRS Discovery District CEO Alison Nankivell notes “the budget’s capital gains tax sparked the most frustration” among entrepreneurs. The hubs say they have been pushing “policy enhancements” in conversations with the government, including tax credits for innovation investment, and adopting capital gains policies in line with the U.S. Qualified Small Business Stock approach, which offers exemptions of up to 100 per cent on capital gains connected to startup investments.
In the survey by the innovation hubs, nearly 80 per cent of the leaders say they have a less favourable view of Canada as a place to run a tech company as a consequence of the budget. Only 3.3 per cent say Canada was the best place to grow a technology company, with 84.1 per cent saying the U.S. was best.
Relocation was in play for 44.4 per cent of the leaders. Just over 23 per cent say they would consider relocating their headquarters outside Canada as a result of the tax change, and just over 21 per cent say they would consider personally leaving the country.
Nearly 60 per cent say the biggest issue with the capital gains tax increase was that it would deter investment and innovation, while 21.9 per cent say the biggest issue would be harm to job creation and talent recruitment.
“The increase to capital gains negatively impacts my ability to attract Canadian executives to work at my company,” one leader wrote. “Since equity is a big part of their compensation, and they are typically taking pay cuts vs. what they may make in a larger company, the fact that the upside is more limited because of a greater tax burden means they are less likely to work for a company of our size.”
John MacFarlane is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jmacf.
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