Isabelle Kirkwood wrote a detailed piece this week about changes to the Canadian Entrepreneurs’ Incentive (CEI)—Ottawa’s attempt to rejig the carveout first announced in Budget 2024 that’s designed to offset capital gains tax rate changes. If the modifications were meant to appease those who generally feel scorned by the new measures introduced in this year’s budget, the government gets an incomplete grade.
Startups generally offer lower salaries than large enterprises, but sweeten the deal with stock options to attract talent. Founders get senior operators to help build the business, and upon exit, those employees are rewarded for their hard work. But when they exercise those options now, the capital gains tax rate changes mean the government gets a bigger cut.
While CEI will now spare “the majority of founding teams” from the tax rate increase, according to Communitech CEO Chris Albinson, their employees aren’t so lucky. Why? Employees rarely own the five percent of the company required to utilize CEI. The same is true for early-stage and angel investors at time of exit. That means less incentives for high-performing workers to join startups, and a higher hurdle for investors to return capital.
Maverix Private Equity founder John Ruffolo told BetaKit, “Taxes on capital do exactly what common sense implies—it reduces the availability of capital as the capital moves to the places of least friction over time.”
While the cutting of the ownership stake from 10 percent to five percent is significant, it’s a half measure that ignores key contributors to entrepreneurship: the investors and the employees. John Oakley, vice-president of taxation at CPA Canada, summed up the modifications best: “Complicated rules (CEI) to mitigate the impact of complicated rules (increase to capital gains) does not do our tax system any favours.”
Thanks for reading on and ’til next week,
Bianca Bharti
Newsletter editor
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TOP STORIES OF THE WEEK
Phil Cutler removed as Paper CEO, startup reportedly cuts staff by 45 percent
Montréal-based EdTech startup Paper has reportedly made more layoffs — the deepest of several rounds of cuts over the past year — this month and shifted co-founder Phil Cutler out of the CEO role.
First reported by The Globe and Mail, co-founder Roberto Cipriani confirmed that Paper cut 45 percent of its approximately 180 head office employees in late July, just a few weeks after Cutler’s CEO chair was taken over by Rich Yang. Yang is a Silicon Valley EdTech veteran, having led Education.com to be acquired by IXL Learning and served as the president of Learneo’s vertical businesses and corporate development.
IRCC takes over sole administration of Start-up Visa Program from NACO, CVCA
Canada’s Start-up Visa program is under new leadership as the federal government reviews “ongoing challenges” with the program, BetaKit has learned.
In December 2023 episode of The BetaKit Podcast, Yuri Navarro, the former CEO of NACO who was involved in creating the SUV, explained that the program was intended to take the decision-making process away from the bureaucrats in government and towards investors and incubators who could more expertly determine the viability of an innovative business, though immigration officers would still have the final say.
“Whereas the angel stream and the VC stream had to put money up to support the companies … the incubators didn’t have to, but also were able to charge the companies for services,” he said, adding that this structure has created opportunities for some organizations to “use the program to their advantage,” he added.
Canadian VC investment grows in Q2 but seed funding a cause for concern
Nearly $2.4 billion CAD in total VC funding was deployed into Canadian technology startups across 143 deals during the second quarter, per CVCA’s latest VC market report. This marks an improvement compared to Q1 on both counts but trails the second quarter of 2023.
On a year-over-year basis, total funding declined by 14 percent and deal count dropped by nearly 16 percent in Q2 2024. Relative to what was a mixed Q1 for Canadian VC funding though, VC investment jumped 85 percent while deal volume increased by only five percent.
In a statement, Furlong said this performance was “driven by investors doubling down on companies with proven track records and strong fundamentals,” reflecting what many VCs have dubbed a ‘flight to quality’ amid the tech downturn.
Kraken appoints Alex Mehrdad as new leader of crypto exchange’s Canadian operations
Alex Mehrdad recently took the reins as the San Francisco-based company’s general manager of Canada from former Canadian managing director Mark Greenberg, who was promoted earlier this year to leading Kraken’s newly established global asset growth and management division.
The move follows a period of growth in Canada for Kraken, which began building a dedicated Canadian team in fall 2022, committed to working with Canadian securities regulators early last year when it filed a pre-registration undertaking, including a ‘coming-out party’ in August 2023 alongside Coinbase at Toronto’s Blockchain Futurist Conference.
Kraken claims that over the past year, under Greenberg’s leadership, it has doubled the size of its Canadian business. “What happened is Kraken Canada was a big success within Kraken,” Mehrdad told BetaKit in an interview at this year’s edition of the Blockchain Futurist Conference.
BC Securities Commission panel finds ezBtc diverted customer funds to gambling, personal accounts
The BCSC panel has found that Nanaimo, BC-based cryptocurrency trading platform ezBtc committed fraud by lying to its customers and diverting approximately $13 million of customer assets to gambling and the personal accounts of owner David Smillie. BCSC had first acknowledged that it received complaints about ezBtc in 2019 before officially bringing its allegations forward in May 2023.
In one case, BCSC found that a customer’s bitcoin deposit was transferred to a gambling website within 14 minutes.
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Funding, Acquisitions, and Layoffs
BUR – Svante – $137M CAD
VAN – Well Health plans to spin out SaaS business
CGY – CruxOCM – $23.3M CAD
TOR – Radical Ventures – $800M USD
TOR – Sampler files for bankruptcy
OTT – Feds fund $39.2M for CanCode program
OTT – NGen invests $21.4M across 15 projects
OTT – MaxBounty acquired by Mrge
HFX – Sona acquired by Celero Commerce
HFX – QuickFacts – $2M CAD
The BetaKit Podcast
Canadian Web3 regulations & Coinbase’s year in review
“I think it’s really important for Canadians to speak to their public officials and remind them that this is an important industry. They should be taking it seriously. They should be putting in the time to speak with industry and learn about it.”
Live from the Blockchain Futurist Conference, award-winning BetaKit reporter Josh Scott moderates two important conversations: a year in review with Coinbase Canada CEO Lucas Matheson; and a Canadian Web3 regulation check-in with Dan Nuñez Cohen (Crypto.com), Kunal Bhasin (KPMG), Morva Rohani (Canadian Web3 Council), and Suzanne Lasrado (CIRO).
Feature image courtesy Burnout Stock photos by Vecteezy