Article content

If there’s an uncomfortable economic lesson of the past few years, it’s this: The vibes matter.

As much as economists point to data, the reality in politics and policy is that public expectations and perceptions are important too. And from a business perspective, the vibes of the 2024 federal budget are rancid.

Article content

The budget document’s title is “Fairness For Every Generation” and in practice, what that meant was a “soak the rich” tax hike on capital gains.

Article content

You can see how this looked like good politics. In her budget speech, Finance Minister Chrystia Freeland said that only 0.13 per cent of Canadians with an average annual income of $1.4 million will pay higher taxes — hardly a sympathetic lot, at a time when many Canadians are struggling to pay for food and housing.

The problem is that the proposed capital gains tax hike won’t only soak a handful of rich Canadians as advertised. In its current design, it broadly punishes individuals and families of small business owners, tech entrepreneurs, dentists and countless others who have often spent decades trying to build their businesses for a potential once-in-a-lifetime capital gains event. Together, our analysis suggests that those people represent closer to 20 per cent of Canadians.

This tax proposal simply amounts to a systemic tapping on the brakes on the investment in a productive and prosperous future, being made by innovative, hardworking Canadians. And it does so at the very time Canada needs them to accelerate their investing.

But among the innovators and business leaders I talk to in the Canadian tech sector, this week’s budget was a chilling shock. There is a sincere and widespread belief that if something does not change, the budget will do widespread and irreparable damage to Canada’s tech sector.

Article content

Article content

That’s why more than 1,000 CEOs have signed a public letter to Prime Minister Trudeau and Deputy Prime Minister Freeland at ProsperityForEveryGeneration.ca, calling on the government to stop this tax hike. Innovators understand what’s at stake.

Firstly, we are at a moment when capital is harder to access than at any time in the past generation. Higher interest rates and economic uncertainty mean that many high-growth companies with innovative products struggle to secure growth capital on favourable terms.

South of the border, we’re seeing strong growth, driven by significant government investment through strong industrial policy, alongside significant growth in bleeding-edge artificial intelligence applications. The U.S. is an exciting place to invest right now.

And capital is highly mobile. If Canada is seen as an unfriendly place to invest, due to high taxes, investors will simply take their money elsewhere, and propel the growth of promising tech companies in other countries.

What’s more, highly skilled talent is more mobile than ever before, and among innovative high-growth companies, stock options — subject to capital gains tax — are a key form of compensation.

Article content

We’re not talking purely about CEOs and tech founders here either. The dedicated early players of a promising tech startup earn their stock options with sweat equity. Their dedication, taking a risk in the prime of their career, is often the key ingredient for the success of future innovation champions.

Innovators are intimately aware of these concerns, because this isn’t the first time the Liberal government has tried to tax stock options. Nearly a decade ago, they promised to hike taxes on stock options in their 2015 campaign platform, and it took years of public advocacy from tech leaders to help the government understand the potential unintended damage that a reckless tax hike could do on the ability to attract and retain talent.

All along the way, we were assured by the government that they knew what they were doing, and there was nothing to worry about. In truth, after many frank conversations, they changed course.

In the days and weeks ahead, I’m expecting to hear the same kind of thing again. Already we’ve heard from government officials pointing to the “Canadian Entrepreneurs’ Incentive” carve-out, which will soften the blow of higher capital gains tax rates overall. The details of this carve-out are not yet fully clear, and it’s possible that the government will tinker with the thresholds to help mitigate the damage of a tax hike on capital gains.

Article content

But the reality is that without a significant change in messaging, the danger to Canada’s economy is real.

Capital gains are taxed at a different rate because they are taxes on investment. Every investment comes with risk; you are not guaranteed to make a profit. The tax code takes this into account.

If the vibes are off, and the global perception of Canada is that we’re not a place where the investment risk is worth it, because the federal government is just going to tax you to death, then we simply won’t see capital or talent flow to Canada.

Innovation and entrepreneurship are about hope. You fundamentally need to be an optimist to risk it all, and invest yourself in growing a business. Right now, Canada’s federal government is not sending a hopeful vibe. And the vibes matter.

Benjamin Bergen is president, Council of Canadian Innovators.

Article content