The Cost of Staying: Why Canada Needs a QSBS-Style Tax Shield to Stop the Brain Drain
AI-generated image · Bay Street Wire
Industry leaders argue that without aggressive capital gains reforms, Canadian founders and investors have every incentive to move their success south of the border.
For any commerce operator scaling a business in Canada, the math of a successful exit is increasingly fraught. When the goal is to build a sustainable domestic ecosystem, the tax code shouldn't act as a penalty for success. Right now, it does.
As BetaKit first reported, a group of tech and investment associations—including the Council of Canadian Innovators (CCI), the Canadian Venture Capital and Private Equity Association (CVCA), the National Angel Capital Organization (NACO), C100, CPA Ontario, and the Chartered Business Valuators Institute—have sent an open letter to Canada’s finance minister. Signed by more than 150 investors and tech leaders as part of the "Bet on Canada" campaign, the letter argues that federal tax reforms are essential to retain capital, founders, and talent within the country.
***Opinion:*** *From an operator's perspective, the lack of a competitive tax incentive for early equity holders creates a structural disadvantage. If the reward for scaling a company in Canada is a significantly higher tax bill than what a founder would face in the U.S., the logical move is to migrate the business or the talent to the U.S. market. We aren't just losing companies; we are losing the compounding effect of successful founders reinvesting their wins into the next generation of Canadian startups.*
Central to the "Bet on Canada" proposal is a tax incentive modeled after the U.S. Qualified Small Business Stock (QSBS) regime. BetaKit reports that under the U.S. system, early stockholders can exclude as much as 100 percent of federal capital gains when a company is sold. While the federal government proposed a Canadian Entrepreneurs’ Incentive in 2024, the industry groups argue it falls short. That proposal would reduce the inclusion rate to 33.3 percent on a lifetime maximum of $2 million in eligible capital gains. The coalition is pushing for that maximum to be raised to $15 million per transaction and for eligibility to expand beyond founders to include early investors and stock-holding employees.
Beyond the initial exit, the group is calling for a capital gains rollover. This would allow investors to defer taxes if the proceeds from one Canadian business investment are reinvested into another domestic company. CVCA CEO Benjamin Bergen told BetaKit that this reinvestment must be directed toward a Canadian-owned corporation rather than a subsidiary of a foreign entity. Bergen's goal is to ensure that those who achieve a large exit are incentivized to "keep playing" and put their capital back into building new domestic companies.
This isn't just a tech play. The open letter specifies that these incentives should extend to other critical sectors, including mining and advanced manufacturing. The objective is to de-risk early investments and create a circular economy of capital within Canada.
While the industry previously clashed with the government under Prime Minister Justin Trudeau over capital-gains inclusion rate increases, BetaKit notes that Prime Minister Mark Carney’s administration has signaled a shift toward business-friendly policies, such as the Productivity Mega-Deduction. The question now is whether the upcoming federal budget will include the aggressive tax shields necessary to keep Canada's best entrepreneurs at home.