Tech entrepreneurs are packing up and leaving Canada following the proposed capital gains tax increase from the Feds, says former Wattpad CEO Allen Lau.

In mid-April, Canada’s federal government tabled its 2024 budget, which included intentions to raise the inclusion rate on capital gains taxes from one-half to two-thirds for all gains realized by corporations and trusts. The new rate would only impact individuals with gains above $250,000.

The Canadian tech community has been vocal about concerns to the capital gains tax increase online and in interviews on BNN Bloomberg with a key focus on how it will affect Canada’s productivity landscape. Allen Lau, former CEO and co-founder of Wattpad and current co-founder and operating partner at Two Small Fish Ventures, says Canada’s at risk of losing its tech talent.

"Higher taxes means less capital available, diminishing ownership and less economic benefit, period," said Lau. As a tech venture capitalist investing in Canadian companies, he said the firm is hearing a lot of anger from the start-up community. 

"Canadians should own a significant piece of great Canadian companies. But now we are giving away our grand prize to foreign investors," said Lau. "A lot of times, my VC company is the only Canadian investor in Canadian startups."

Bad policy

When asked if Canadian policy makers are accurately supporting the technology startup community in this country, Lau said “we collectively feel the policy members are forgetting we’ve entered a new era. We are transitioning from the industrial age to the information age, from tangible assets to intangible assets. As a result, we need to own these technologies, [intellectual property] and companies and right now we are going backward."

Lau cites a survey from MaRS, a Toronto-based tech innovation lab, which found that of the more than 150 founders who responded, 95 per cent do not think Canada is the best place to grow a technology company

The capital gains tax increase “will make it harder for me to find Canadian founders and companies to invest in and these companies are increasingly owned by other countries,” said Lau.

Wattpad's story

From his experience as a Canadian tech entrepreneur who co-founded and sold Toronto-based multi-platform entertainment company Wattpad for $754 million in 2021 to South Korean internet company Naver Corp., Lau says the new tax is a real issue for Canada.

"When I was an entrepreneur here 10 years ago, every venture capitalist was asking me 'when are you going to move to the valley?' Obviously I’m still here, but as an investor now I have a lot of visibility and we see U.S. investors becoming extremely aggressive in buying up shares of Canadian companies, especially when they are young.”

Saving Canada’s AI advantage

Lau said the new capital gains tax increase is not creating a welcoming environment for innovation and bold thinking in the Canadian startup community, especially when it comes to AI.

"This is a five-alarm fire situation," said Lau. "We have seen entrepreneurs already packing up. I even learned of a Canadian venture fund that plans to pack up and go," he said, citing an unnamed VC. “This is not an empty threat; this is really real for Canada."

 “We are incredible at AI research. The problem is we are not benefiting commercially or economically from it,” said Lau. “Tech entrepreneurs are in the best position to solve this productivity crisis.”

When asked if big tech entrepreneurs are obligated to ‘pay their fair share’ as the economy feels the weight of higher inflation and interest rates, Lau says the economic benefits of Canada’s tech community will be diminished as the country loses startup ownership.

"This will cause a long-term impact and the next generation will be left with breadcrumbs."

"I’m not a policy-maker, but as an experienced leader I know the first thing to do is to make sure your house is in order. To have to choose between raising taxes or investing in the right programs for Canadians, that’s a false dichotomy."