What Canada's Capital Gains Changes Mean for the Tech Sector

The federal budget has drawn sharp criticism from Canada’s innovation sector. Prominent technology companies, including Shopify, warned that proposed capital gains changes in the fiscal plan could inflict lasting damage on the country’s entrepreneurial ecosystem.

What the capital gains tax change means to the tech industry

The budget tabled on Tuesday, April 16 proposes raising the taxable portion of capital gains from one-half to two-thirds. The government would also apply that higher inclusion rate to individuals with capital gains exceeding $250,000 in a year. Officials say the change affects only the wealthiest 0.13% of Canadians and would raise roughly $19.3 billion over five years. Nevertheless, the announcement generated swift and intense disapproval across the technology sector.

Benjamin Bergen, president of the Council of Canadian Innovators, described the reaction he heard from leaders nationwide. “My phone was exploding with texts from leaders across the country saying, ‘This is a nightmare. You have to fix this. They don’t know what they’re doing,’” he said. Industry representatives warn the measure will discourage founders and employees from building companies in Canada or remaining here to exercise stock options.

The concern centers on how stock options and equity compensation are treated. Many employees who join startups—marketing specialists, sales professionals, legal and operations staff—count on equity and options that are ultimately realized as capital gains. If those gains face a higher inclusion rate, employers fear it will reduce the incentive to take the financial risk of joining early-stage companies, and prompt some entrepreneurs to incorporate and base operations abroad.

That worry is compounded by longstanding talent shortages. An earlier survey of 500 businesses by KPMG found that 80% of respondents needed more workers with digital skills, while two-thirds had difficulty recruiting them. Demand has only increased with the rapid expansion of artificial intelligence following the release of ChatGPT in 2022.

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Is this a tax on the wealthy?

The government frames the measure as targeting the wealthiest Canadians to create greater fairness for younger households facing high living costs. Industry groups counter that the change will hit many mid-career professionals who accept equity as part of their compensation when joining startups and scaleups.

“Those folks who join startups and scaleups as they’re beginning their journey are provided stock options and other benefits, which are ultimately determined as capital gains in the future,” Bergen said. “It’s marketing experts, sales experts, legal experts that are traditionally mid-career that … you’re completely undermining by this type of policy lever that’s being implemented.”

The Council of Canadian Innovators drafted an open letter to Prime Minister Justin Trudeau and Finance Minister Chrystia Freeland urging them to abandon the proposal. By early Wednesday evening, the letter had been signed by leaders from 200 companies.

Finance Minister Freeland’s office responded to criticism by saying the changes aim to promote fairness and address the cost-of-living squeeze for younger Canadians. Still, the industry remains concerned that the policy will reduce incentives for risk-taking and investment in new ventures, making Canada a less attractive place to start and scale technology firms.

Small business owners to see tax changes

The budget does include a targeted relief measure for qualifying small-business owners. A new program would allow certain sellers to be taxed on only one-third of the capital gains when they sell their business, up to a lifetime limit of $2 million. That measure is intended to support small-business succession and encourage owners to invest and reinvest in their ventures.

“What. Are. We. Doing?!?” — Harley Finkelstein, Shopify president, reacting to the proposed capital gains changes.

Several Shopify executives publicly criticized the proposal. Harley Finkelstein warned the budget’s measures would penalize innovators and risk-taking, arguing Canada should be doing everything possible to become the best place for entrepreneurs to build. Shopify CEO Tobi Lütke also expressed alarm, relaying a friend’s comment that Canada appears determined to deter innovation. Forbes has estimated Lütke’s net worth at about USD$6.4 billion.

Kim Furlong, CEO of the Canadian Venture Capital and Private Equity Association, said she was “baffled” by the changes. “This measure, which effectively taxes innovation and risk-taking, will significantly dampen Canada’s entrepreneurial spirit, stifle economic growth in critical sectors of our economy, and impact job creation,” she wrote. Furlong pledged to “work tirelessly to reverse the decision.”

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AI technology in Canada

Alison Nankivell, CEO of the MaRS innovation hub in Toronto, said the debate highlights a tension between fairness and economic opportunity. “In some ways, what you’re hearing from the entrepreneur community is a feeling that that balance is maybe not where they want it to be in terms of the ability to build a business,” she said.

At the same time, Nankivell noted the budget includes several measures that could benefit the technology sector. The government set aside $2.4 billion to strengthen artificial intelligence capacity, with a significant portion directed to a fund that would expand access to computing power and technical infrastructure. That investment aims to help ensure Canada has adequate chip capacity, data centers and server farms to support future AI development.

The budget also directs funds toward programs that will co-invest with the private sector in promising Canadian companies, authorizes the Financial Consumer Agency of Canada to oversee open banking implementation, and outlines steps to modernize how crypto-asset transactions are reported. These provisions are intended to bolster the innovation ecosystem even as the capital gains proposal unsettles many industry leaders.