Canada’s proposed tax changes will stifle investment in early-stage startups

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I am a lifelong entrepreneur, small business owner, and investor. Not once in my 40-year career of making my own way have I ever complained about the Canadian tax system.

I have always felt that it was such a privilege to live in this great country that I was more than happy to pay an outsized share of the cost to run it. We have always looked after our own here, and believing in that approach has made paying more than 50 cents on a dollar earned acceptable to me. While unfair on the surface, 10 percent of the country’s population paying 54 percent of the total income tax was reasonable to me.

One benefit of being around for a while is that time and being exposed to constant change gives one perspective. My father, a small business entrepreneur, arrived in this country with a mere $60 in his pocket and only a grade 8 education. Nevertheless, he went on to build a very successful business that employed many Canadians and expanded our country’s tax base.

The technology industry is now going through a particularly interesting time, one full of opportunity.

Sadly, that business was nearly lost in the early 80s when interest rates shot up to 24 percent. Those incredibly tough times when my family nearly lost everything did not lessen my father’s passion for business, nor his desire to be a difference maker. He believed (and still does) that prudent risk-taking is what drives our economy forward. He found a way to back me and three buddies in an early-stage company that eventually evolved into Lavalife.

It was sold in 2004 to a US company for $180 million. My father’s risk-taking, combined with our seven-day-a-week hard work, created a huge Canadian success story and a windfall for Revenue Canada.

The most important part of that story is what we, the founders, did with most of the after-tax proceeds of the sale. We invested in other Canadian entrepreneurs.

This story is not unique. There are well over one million small businesses in Canada, the majority of which were started from scratch. Small businesses provide over 8 million jobs to our economy, representing over 70 percent of all private-sector employment. The owners of these businesses do not have the backstop of severance, do not have defined-benefit pensions, and do not have generous benefits packages. Yet, they drive us forward by creating jobs and bringing innovative products and services into our lives. Small business is the lifeblood of the Canadian economy and — excuse my language — it’s fucking hard work.

Related: Round 13’s Bruce Croxon says proposed tax changes disincentivize Canadian entrepreneurs

The technology industry is now going through a particularly interesting time, one full of opportunity. We are producing second and third-time entrepreneurs that have exited businesses and are reinvesting both with their time and their money. We have the best engineers in the world, as the multinationals setting up shop here will attest. The venture capital is starting to flow here, and we have the benefit of a US president creating an environment of disharmony to the south. Canada has never been in a better position to capitalize on my long-held belief that our tech entrepreneurs can hold their own with anyone in the world.

Our government has been right there talking up our growing companies, contributing money to venture, and encouraging innovation. All this while maintaining commitments to fighting climate change, fighting for the rights of Indigenous people, and generally making us proud on the world stage. What a great country we live in, and what a fantastic time to start a business. This is our time! I have said that over and over again on The Disruptors and wherever I’ve had an audience. I feel it and so do many others.

Ah, but not so fast. Despite being on track for record tax collection, it appears that our well-intentioned government doesn’t really understand what every small business owner intuitively knows (or is forced to learn quickly): you shouldn’t consistently spend more than you bring in.

If you do that in business, you will go broke unless you can find another source of capital. Unfortunately for us, our government thinks it has found its own new source: private small and medium-sized businesses. The marketing plan is simple: have the wealthiest among us pay a little more so that those who need it most can benefit.

In the tech sector, the vast majority of startups get their funding from other small business entrepreneurs.

As we are discovering, however, this isn’t about taxing the wealthiest among us at all. This is an all-out attack on entrepreneurs, practitioners, and family-farm owners (i.e. everyone not a private-sector employee or government worker). This is a hastily put-together plan, launched in the summer with a very short consultation period under the guise of “fairness.” It’s an embarrassing, short-sighted, and ill-conceived execution of a deeply-flawed plan.

How “fair” is it that Canadians who have worked hard all of their lives are now faced with unforeseen taxes on the potential rewards of all the risks they’ve taken, and incredible effort they have put forth to build their businesses? How fair is it that the spouse who has contributed to the family business by covering the home front for the 60-plus-hour-a-week entrepreneur will now not be able to be properly compensated?

And how is any of this good for our country? In the tech sector, the vast majority of startups get their funding from other small business entrepreneurs. One major fallout from the proposed Liberal tax changes is that there will be a lot less of this money available for investment. Over 80 percent of startups are funded by personal capital. Every small business owner in the country knows full well that this void will not be filled by the Canadian chartered banks.

Related: BlueCat’s Michael Hyatt explains why proposed tax changes are an attack on entrepreneurs

How is it good for our country when the savings put aside for the years that a business does not do as well as its norm are now going to be taxed at potentially 70+ percent? How is this “dead” money? It’s not only alive, but also living a very important existence.

How is it good for our country that, so often now, the best jobs are government jobs–ones where salaries are, on average, higher than those in the private sector and have vastly superior job security and, of course, have some of the most generously defined-pension benefits in the world?

This is not the Canada that my father made his mark in, and this is not the Canada that I have told my children about. By daring to dream big, small business owners have helped create a country that seemingly has it all. Our growth has been strong, inflation low, and the dream was real. Now, with rising insurance premiums, high urban rents, increasing employee-benefit costs, flying hydro rates, challenging new labour laws, and new minimum wage levels, achieving success is exceptionally difficult.

However, many of us embrace that challenge on a daily basis. That said, there comes a point when you realize that the best jobs are, indeed, government jobs and that the risk-reward ratio has finally tipped against the entrepreneur.

These planned, unfair tax changes are that tipping point.

Please visit wtfjt.ca to make your voice heard.

For a detailed look into how these tax changes would affect entrepreneurs, check out this CanCon podcast featuring LiveCA founder Josh Zweig, and ScaleUP Ventures partner Matt Roberts:

Bruce Croxon

Bruce Croxon

Bruce Croxon is the Managing Partner at Round13 Capital. He spent the first half of his career piloting Lavalife from infancy through to its sale in 2004 for $176 million. Following his three-season stint on CBC’s hit show Dragons’ Den, Bruce co-founded Round13 to help fund Canada’s most promising growth stage digital companies.