Thank you to The Globe for publishing my op-ed about the recent capital gains tax increase last week. The piece is now available here.

Once again, to summarize, as the world shifts to intangible assets, the consequences go far beyond brain drain and job loss. We risk losing out on the GREATEST prize: ownership of industry-disrupting, IP-based companies and technologies. This aspect, often overlooked, is illustrated with real-world numbers.

Not having significant ownership of these assets in the information age is equivalent to not having electricity and oil in the industrial age. This would have a devastating and long-term impact on our economy and reputation on the world stage. Canada would be left behind with digital breadcrumbs, selling our next generation short.

The policy change clearly didn’t take this into consideration. Saying that it impacts only 0.13% of the population is so wrong on many fronts. It is abundantly clear that it will impact EVERYONE.

Don’t forget to tell them.

Here is the full copy of my op-ed:

The Liberal government is increasing taxes on investment. Anyone experienced in entrepreneurship and investment knows this will stifle growth. We are at tremendous risk of losing our brightest entrepreneurs – along with the high-skilled jobs they create – to other countries.

This is evidenced by a new survey conducted after the capital-gains tax changes: Just 5.3 per cent of Canadian founders believe Canada is the best place to grow a company.

As the world shifts to intangible assets, the consequences go beyond brain drain and job loss. We will lose out on the greatest prize of the innovation economy: ownership of industry-disrupting companies and technologies. This would have a devastating and long-term impact on our economy and reputation on the world stage.

I will admit that this latest change to taxation has an immaterial impact on me personally. Wattpad, the company I co-founded, was acquired by Korean internet giant Naver for $840-million in 2021 so I’ve already paid my dues as stipulated under the budget at the time. But my experience illustrates how this tax change is detrimental to Canada and future generations.

Because I raised most of the capital from outside of Canada, only half of the company was owned by Canadians, including founders, employees and investors. In other words, when Wattpad was acquired, $420-million of the economic value left our country.

Before the tax hike, it was reported that when our tech startups become scaleups, about 75 cents out of every invested dollar comes from outside of Canada. This means many of these fast-growing companies are already majority-owned by foreigners.

As a venture capitalist, I see this trend play out all the time. The firm I co-founded, Two Small Fish Ventures, has a portfolio of 50 early-stage tech companies. We are the only Canadian investor in many of our recent investments. Foreign investors, especially U.S. investors, are aggressively writing cheques to own a significant portion of these early promising Canadian startups when they are relatively inexpensive.

The tax increase will only exacerbate this problem.

When a company’s assets are purely intangible, and its biggest investors and markets exist outside Canada, it’s natural and far easier for the company to move outside Canada or be acquired by foreigners, such as Wattpad. Needless to say, the economic value creation postacquisition is also captured outside of Canada.

One might argue that these companies create many jobs in Canada, so we still captured some value, right? Well, again, when a company’s assets are mostly intangible, the majority of the economic value created is captured by its IP, not the jobs created. As an example, Wattpad’s payroll was about $30-million per year, not small, but it is a minuscule number compared to the nearly billion dollars that the company was valued at.

There’s also a tectonic shift under way across the innovation economy. The rise of AI and related fields such as semiconductors in particular is an order of magnitude more capital-intensive than previous generations of tech companies. Canada has produced some of the best AI researchers in the world, but when 40 of Forbes’ 2024 AI 50 List are in the U.S. (and more than 30 of them in Silicon Valley) while only two are in Canada, we could have and should have owned a much bigger piece of the pie.

The best example is OpenAI, which was co-founded by Ilya Sutskever, a Canadian. The company is based in San Francisco. The majority of its employees are not in Canada. All the major investors are U.S.-based. Canada only has the bragging rights.

And, do I have to remind everyone that Elon Musk is also Canadian?

In the post-pandemic world, capital and talent are more mobile than ever. The pull to move to other countries is also stronger than ever. Canada is already becoming the best training ground for other countries to capture the value created by these companies outside of Canada.

I want Canada to win. I really do. What motivates me now as an investor is to help create more homegrown Canadian tech giants – and to keep them in Canada. My job just got much harder.

Higher taxes mean less capital, reduced investment, diminished ownership and fewer economic benefits. Period.

At a time when we need more capital to own a meaningful piece of the IP-based economy, our country is going backward. As the economy increasingly shifts toward intangible assets, we will be left behind with digital bread crumbs, selling our next generation short.

P.S. This blog is licensed under a Creative Commons Attribution 4.0 International License. You are free to copy, redistribute, remix, transform, and build upon the material for any purpose, even commercially, as long as appropriate credit is given.