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Opinion: The federal budget is a taxing blow to Canada's innovation economy

Ottawa’s proposed fiscal policy targets risk-takers, not just the wealthy
Ottawa will increase its capital gains inclusion rate from 50 per cent to 66 per cent

In the unveiling of the 2024 federal budget, Ottawa's decision to increase the capital gains inclusion rate from 50 per cent to 66 per cent stands out as a stark blow to Canada's innovation sector. This move, positioned as a tax hike on the wealthy, is in reality directly opposed to the spirit of risk and innovation that drives our economy forward.

The news of the proposed change was dropped during the InnovateWest conference in Vancouver last week, where entrepreneurs, investors and other stakeholders in the innovation ecosystem were gathered to discuss ways to enhance Canada's innovation landscape and foster more entrepreneurship in this country. Details of the proposed tax changes spread through the conference like wildfire, taking the oxygen out of the room.

The government may present it as a tax increase on the wealthy, but this representation is misleading. In reality, it's a tax increase affecting anyone taking risks in the Canadian economy—not just founders but also the hundreds of thousands of employees in Canada’s innovation sector. Many choose these roles over "safer" options, trading higher salaries for equity and stock options, which offer the promise of capital gains taxed at a lower rate. This asymmetric reward system underpins the economics of innovation, motivating Canadians to take risks that ultimately fuel growth for the broader economy and create thousands of jobs.

We should be nurturing the spirit of entrepreneurship and innovation that leads to the rise of more Canadian anchor companies, like Shopify or Clio. Ottawa’s proposed fiscal policy plan would have the reverse effect. It would further chill an already cooling innovation economy, evident in the staggering decline of 100,000 entrepreneurs since 2000 and a productivity crisis labelled as "an emergency" by the Bank of Canada.

This tax hike also directly contradicts the government's purported goal of fostering job creation and economic growth, a central tenet outlined in this budget: “Get a good paying job.” While Ottawa should be commended for allocating resources for digital skills development and training, the suggested increase in the capital gains inclusion rate counteracts these initiatives. It deters innovative Canadian companies from attracting investment, expanding operations and creating high-quality employment opportunities, which hinders the prospects for the next generation to secure the roles for which they are being trained.

Let's be clear: This isn't just about protecting the interests of a select few; it's about safeguarding the future prosperity for innovation and growth in Canada. The success of startups and innovative companies reverberates throughout the economy, creating jobs, driving growth and fostering a culture of innovation that benefits us all.

Canada cannot afford to stifle its potential as an innovation powerhouse. We have all the ingredients for success—talent, education and quality of life standards. What we need now is a fiscal policy that nurtures, rather than stifles, innovation and entrepreneurship.

Jack Newton is the CEO and founder of Clio, a company revolutionizing the legal experience through cloud-based and client-centered legal technology.