Tech sector urges Ottawa to expand capital gains tax incentives for startups

More than 100 businesses, industry groups and executives have urged the federal government to change capital gains tax rules to boost investment in startups. In an open letter to Finance Minister François-Philippe Champagne on Tuesday, the group called for two specific reforms. They want the Canadian Entrepreneurs' Incentive expanded and a new deferral rule for gains reinvested in other startups. The campaign, called Bet on Canada, is led by the Canadian Council of Innovators and the Canadian Venture Capital and Private Equity Association.

The first proposal is to significantly expand the Canadian Entrepreneurs' Incentive, which since 2024 has offered founders a lower tax rate on capital gains. The letter calls for raising the program's lifetime limit from $2 million to $15 million and broadening who can qualify. This change aims to better compete with the United States Qualified Small Business Stock framework. The second proposal would let entrepreneurs and investors defer capital gains tax when they sell a stake in one startup and reinvest the money into another. "For someone who has successfully built or backed a Canadian company, that would create a stronger incentive to put the proceeds back to work rather than take them out of the growth economy," the letter said. The group argues these policies should apply beyond the tech sector to areas like advanced manufacturing and life sciences. They say companies in these innovative fields face similar challenges in attracting investment.

Ben Bergen, CEO of the Canadian Venture Capital and Private Equity Association, said the timing is right as the government prepares its next budget. He noted that while recent summits have focused on big institutional investors, the proposed changes would mobilize individual Canadians. "This policy activates and mobilizes individual Canadians to participate in the economic investment opportunity that is in front of us right now," Bergen said in an interview. He added the question is whether Canada is preparing the ground for future companies.

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The letter states the changes would improve Canada's competitiveness with the U.S., where the QSBS deduction offers a more generous tax break. The American system exempts all capital gains, up to US$10 million or 10 times the initial investment, from federal taxes for qualifying small business investments. Unlike the Canadian incentive, the U.S. framework does not distinguish between founders, investors and employees. "These changes would make Canada more competitive with the United States," the letter said.

It would also send a signal about Canada's ambition to attract global entrepreneurs and investors, the letter argues. The issue of growth capital for domestic startups has been studied for much of 2026 by the Senate committee on banking, commerce and the economy. That committee is expected to release its own recommendations soon. The proposals for a QSBS-style incentive and reinvestment deferrals are among dozens presented to the senators by industry figures.

The letter emphasizes that the benefits would flow to ordinary Canadians, not just large institutions. "Most investors who stand to benefit from this kind of incentive are not large institutional players, but ordinary Canadians," it said. The group framed the request as a way to reward domestic risk-taking. "At its core, this is about rewarding the risk Canadians take when they invest in other Canadians."

With files from The Globe and Mail