The tech industry rejects the federal budget's proposals to increase capital

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TORONTO — The federal budget has cited capital-raising measures in the fiscal plan as a potential cause of “irreparable harm” to Canada's innovation industries, including tech darling Shopify.

The sector was disappointed that the Liberal government's budget proposed on Tuesday proposed to increase the share of capital gains taxed on business income from half to two-thirds.

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The increase applies to individuals with capital gains of more than $250,000 a year and takes effect on June 25.

The increase will affect only the richest 0.13 percent and is said to generate $19.3 billion over the next five years. However, the proposal sparked outrage from the tech industry, which derided the changes.

“My phone was blowing up with texts from leaders across the country saying, 'This is a nightmare.' You need to fix this. They don't know what they're doing,” Benjamin Bergen, president of the industry group the Council of Canadian Innovators, said Wednesday.

The gist of the complaints he filed is that the potential changes will encourage entrepreneurs to open their businesses elsewhere and drive workers in the sector away from Canada as they try to avoid paying more taxes when cashing out stock options.

“If taxation and capital gains are so punishing that it doesn't make sense for someone to choose to stay in the country or leave a traditional job and … start a new company, you lose (the country). the talent he needs,” Bergen said.

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In 2021, 80 percent of the 500 businesses surveyed by consulting firm KPMG said they need more workers with digital skills, but two-thirds will struggle to find and hire such talent. The report was released in 2022 after the launch of ChatGPT before artificial intelligence took off, fueling the demand for tech talent.

While the capital gains tax measures are seen as a way to tax the wealthiest, Bergen said what's in the budget could affect tech workers who aren't in senior positions.

“People who join startups and large-scale companies as they begin their journey are given stock options and other perks that ultimately translate into capital gains in the future,” he said.

“Marketing experts, sales experts, legal experts are generally mid-career … you're going to be completely undermined by this kind of policy lever that's being implemented.”

Such concerns have echoed in the highest echelons of Canadian technology. Several Shopify Inc. executives, including president Harley Finkelstein, announced the change in capital gains X hours after the budget announcement, saying, “What. Are. We. Is it working?!?'

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“It's not a wealth tax, it's a tax on innovation and risk-taking,” he added on Wednesday.

“Our political failures are America's successes.”

Toby Lutke, CEO of the Ottawa-based e-commerce giant, also said a friend sent him a message saying, “Canada has heard rumors of innovation and is determined to leave no stone unturned to prevent it.”

Forbes estimated Lutke's net worth at $6.4 billion. While he has been critical of the federal government's policy decisions in recent months, he previously chaired a digital strategy table that met in 2018 and hosted Prime Minister Justin Trudeau.

Meanwhile, the head of the Canadian Venture Capital and Private Equity Association said on LinkedIn that the changes in capital left him “different.”

“This measure, which would effectively tax innovation and risk-taking, would seriously undermine Canada's entrepreneurial spirit, stifle economic growth in critical sectors of our economy, and impact job creation,” said Kim Furlong.

“Such (a) policy change would undermine Canada's position to attract the talent needed to grow and scale companies here.”

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Furlong pledged to “work tirelessly to reverse the decision.”

Alison Nankivell, chief executive of the MaRS innovation hub in Toronto, saw the reaction to the budget as an expression of a tug-of-war that pits equity against economic opportunity.

“In some ways, what you're hearing from the entrepreneurial community is that the balance may not be where they want it to be in terms of being able to build a business,” he said.

The tension obscured some of the benefits for the sector he saw in the budget.

For example, the government allocated $2.4 billion to boost AI capacity, the bulk of which went to a fund that would increase access to computing and technical infrastructure.

Nankivell was “really happy” to see some focus on AI, as he said Canada needs to consider whether it has enough capacity in chips and server farms to use the technology in the future.

Money has also been allocated to a program that will see Ottawa work with the private market to co-invest in promising Canadian companies, create a financial consumer agency of Canada, oversee bank openings and shape the way the country reports cryptocurrency assets.

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