Canada's Innovation Report Card Viewed in the Context of Budget 2024
The 2024 Innovation Report Card from the Conference Board of Canada paints a bleak picture of Canadian innovation performance, made worse by budget 2024 changes to capital gains tax
A report entitled Canada’s Innovation Report Card was released very recently by the Conference Board of Canada. It paints a bleak picture of Canadian innovation currently, while providing reason to believe that the situation can be improved with sound policy development. This report was followed almost immediately by release of some profoundly unsound policy development in the form of the 2024 budget.
Among the key takeaways from the report is a reference to Canada’s Innovation Paradox, the idea that while Canada excels at producing research results, this excellence does not translate to downstream economic success. The report also notes that Canada has a vibrant spirit of entrepreneurialism and a remarkable tendency for early-stage entrepreneurship. In other words: the intake part of the innovation funnel is overflowing with good ideas and people with the skills to develop them. Why does this not translate into economic innovation and long-term success?
The word “paradox” here is a misnomer and one that should be done away with since it gives the impression that the problem is something mysterious and difficult to address. It is neither of these things. The cause is, and has always been clear: Canada does not support its innovators. Our overflowing innovation funnel is misaligned with the rest of the pipeline, and redirects innovative technologies and innovators to other OECD countries.
The 2024 budget reaffirms Canada’s commitment to its race to the bottom of the rankings.
The main point of contention between the innovation community and budget 2024 is the proposed increase to the inclusion rate on capital gains tax, from 50% to 66%. While the new rate includes a carveout for entrepreneurs, there are so many qualifiers that it is meaningless. My own company, the result of 7 years of academic technology development and another 4 years of commercialization effort, would not have qualified since it was acquired before the 5 year mark. According to budget 2024, I am not an entrepreneur, despite dedicating 11 years of my life to seeing a technology through its entire lifecycle, starting from the basic idea all the way to acquisition.
Canadian innovators are closely aligned in their response: this is a move that explicitly punishes innovation and risk-taking that will cause more harm than good. The rationale for the move is that the additional capital gains taxes collected will provide $1.7B toward mitigating the deficit run by the budget, but this assumes all else being equal and ignores a set of very important facts.
One of the findings of the Innovation Report Card was that Canadians cite fear of failure as a reason for not starting a business at a higher rate than do people in most OECD countries. Previous pundits have attributed this to a lack of entrepreneurial culture generally. The Report Card debunks this, with the finding that “Many Canadians believe they can identify gaps, unmet needs, emerging trends, or areas for improvement in the market or society.” In fact, Canada is leading among OECD countries on several key entrepreneurial metrics, including being able to identify areas for disruption, having the skills needed to start a business, and early-stage entrepreneurship generally.
These apparently conflicting results—strong entrepreneurial skills, opportunities, and early stage involvement, combined with a fear of failure that prevents action—are directly reflective of a complete lack of support within Canada for entrepreneurship at the policy level, which brings us to they key fact that policy makers are missing when they push for an increase in capital gains tax
In a small, open economy like Canada, Canadian innovators can simply leave.
The equivalent capital gains inclusion rate in the United States is just 20%. The capital gains tax increase won’t result in more tax income, it will result in exodus by Canadian innovators and technologies. This is the resolution to the apparently paradoxical results in the Report Card, and the reason for Canada’s Innovation Paradox, a situation that will only be exacerbated by the recent budget announcement.
Building a company is hard. It involves not just the difficulty of getting off the ground, but a massive opportunity cost in the form of deferred earning potential, since many entrepreneurs are taking their shot during prime earning years. The Report Card clearly shows that Canadians are able and willing to build companies, but that they do not feel supported in doing so. That Canadian innovators leave Canada to do their innovation is not new: there are already more Canadian-founded unicorns in the USA than there are in Canada. Budget 2024 doubles down in this trend by punishing innovators for staying, in the face of overwhelming evidence from organizations like the Conference Board of Canada that the problem is the policy-makers, not the innovators.
The number one piece of advice I got from mentors when starting my own company was “don’t do this in Canada.” According to budget 2024, the Canadian government agrees.