A Capital Gains Tax Increase? Now?
The past year has been a strong one for Canada’s biotech sector, as we’ve seen significant deals and company growth. The annual BIOTECanada Investment Summit in early March was attended by a strong and diverse investment/company cohort for the 3-day meeting characterized by fantastic presentations, discussions, and networking. The optimism and excitement regarding Canada’s biotech sector was also evident this week at the annual Bloom Burton Healthcare Investor conference.
While healthcare industry investors and company leaders met in Toronto this week, the federal budget was delivered on Tuesday. To be sure, from a biotech industry standpoint the budget did contain some positive measures including:
- $200 million refinancing of the Venture Capital Catalyst Initiative (VCCI)
- $2.4 billion investment in growing Canada’s AI expertise and competitiveness
- $600 million to enhance Canada’s SR&ED tax credit
- A commitment to continue the process of engaging with Canadian institutional investors to encourage them to invest more in Canada
These measures coupled with the federal Biomanufacturing and Life Sciences Strategy investments already at play and the momentum the biotech sector is experiencing more broadly should have been important and timely catalysts to drive Canada’s biotech competitiveness and create a stronger domestic ecosystem and biomanufacturing capacity.
However, if applied as written, the Budget’s measure to increase the tax on capital gains above $250,000 stands to undercut not only the investments being made by the government but will also significantly undermine the ability of companies in innovation sectors such as biotech to attract the talent and investment required to grow and ultimately commercialize their innovations.
Biotech companies (and others in similar sectors such as clean tech and IT) require access to significant investment capital and highly specialized talent. Companies looking to attract investment and talent must draw from Canadian and international sources. Importantly, other jurisdictions are aggressively competing for the same investment and talent. Ultimately, investors and talent are global nomads; they will go where they are most valued and rewarded. For Canadian companies, given our geographical proximity, the gravitational pull of the US market is a significant competitive challenge to overcome unarmed.
Employees entering or already in the biotech industry know the risks of building a biotech company. They agree to share the risk by having a compensation package that is part salary and part options. This helps companies effectively deploy investment capital and rewards risk sharing should a company succeed in commercializing the innovation. For Canadian biotech companies, stock options have become an increasingly important tool to overcome the US gravitational pull and establish Canada as a competitive environment attractive to investment and talent.
With the strategies and corresponding investments designed to drive Canadian domestic biotech, AI, clean tech, and biomanufacturing sectors, the government has smartly recognized the importance of the innovation sector to its long-term economic competitiveness. Canada's biotech sector is experiencing a generational period of momentum and success. In this context, it is perplexing why the Budget would propose a measure now that will undermine the investments the government has made, slow the sector's momentum, and impact the competitiveness of Canada’s innovation sectors more broadly.
Andrew Casey is the President & CEO of BIOTECanada, a national industry association representing over 200 members located the country, reflecting the diverse nature of Canada’s health, industrial and agricultural biotechnology sectors.