May 2, 2024

Chris Albinson, President & CEO, Communitech

We’ve been working hard to ensure Canada remains a competitive place for founders to start, grow and succeed. While the federal budget shows some promising steps forward, such as investments to support AI and improvements to the SR&ED program, founders are concerned about proposed changes to capital gains, fearing their potential to compound existing challenges amidst economic fluctuations and productivity worries. In Budget 2024, it’s clear we must prioritize a holistic approach to strengthening Canada’s innovation ecosystem.

We deeply value the voices of our founders and our goal in representing their concerns is to be as constructive as possible. We’ve engaged in a thorough review of the federal budget and have been working with our partners and the federal government to understand the impacts of these proposed changes while partnering on possible solutions. We’ve taken a thoughtful and evidence-based approach to make the strongest case possible for founders.

Founders’ Feedback

Communitech, alongside MaRS and Invest Ottawa, conducted a founders survey and heard from over 130 respondents. Results show a variety of viewpoints, including a strong desire for policy reforms to more effectively support Canada’s tech sector.

• Factors Impacting Innovation: Half of respondents (50 per cent) identified non-business related support, such as housing affordability, as critical to innovation. Nearly 47 per cent called for stronger tax incentives for commercialization and 40 per cent would like to see the government stimulate demand through government procurement. These findings highlight the importance of addressing both direct and indirect factors impacting innovation to elevate Canada’s global competitiveness.
• Capital Gains Tax: The majority (80 per cent) of respondents believe proposed changes to the capital gains tax overshadow any potential benefits of other budget measures. While 10 per cent find it fair to align capital gains tax with salary tax rates, and 26 per cent don’t plan to change their strategies, sentiment remains less optimistic. Over half (58 per cent) view the increase as a barrier to innovation and investment, with 23 per cent concerned about its impact on job creation and talent recruitment.
• Commercialization Opportunities: Only six per cent of respondents consider Canada the best place to grow a tech company. Founders pointed out some of the advantages of working in the US, such as access to a larger customer base, smart capital with deep pockets, and experienced executives with experience in scaling operations. This highlights the need for Canada to improve its appeal when it comes to R&S and position itself as a prime location for commercialization.

Proposed Solutions

Communitech strongly encourages the government to make a targeted adjustment of the Canadian Entrepreneur Incentive (CEI) and immediately harmonize it with the U.S. Qualified Small Business Stock (QSBS) approach. We propose implementing tax credits or refunds for investments in Canadian innovation, alongside increased capital allocation through agencies like EDC and BDC to support early-stage ventures. We also recommend extending preferential capital gains tax rates to all employees holding stock options, with a consideration for grandfathering existing stock option grants under previous capital gains regulations.

This targeted adjustment would:

• allow Canada to remain competitive on talent attraction
• ensure Canada remains competitive on risk capital investment
• allow for recycling of risk capital
• is accretive to company formation, employment growth and tax revenues
• maintains Canadian Controlled Private Corporations (CCPC) as the cornerstone of Canadian-owned and retained economic growth and productivity gains

Looking Ahead

At Communitech, we’ve engaged in constructive dialogue with policymakers who are receptive to our suggestions and understand the urgency of creating a competitive and supportive environment for innovation.

We also visited Ottawa earlier this week where we engaged with government officials during four days of meetings with a 40-person delegation from our partners at Canada’s Tech Network (CTN), which represents over 7,000 founders across the country. We communicated founders’ concerns directly to government representatives and presented data/evidence based recommendations.

Creating a strong ecosystem goes beyond fiscal fixes. It requires a comprehensive strategy to support founders at every stage of their journey. By continuing to advocate for the needs of our founders, we are dedicated to building an ecosystem and shaping a future.

Canada needs to remain the best place for founders to start, scale and succeed.