Tax credits not the answer to innovation blast-off

Could our country really be just one tax break for investors away from unlocking its innovation potential?

That’s what Liberal leadership candidate Marc Garneau suggested at StartupGrind Toronto on Tuesday night.  The MP and first Canadian to visit space provided more details on some of the economic policies he recently introduced to his campaign.

The  fireside chat started with Mr. Garneau recalling his experience as an astronaut, and were then followed by an interesting discussion around his policies as they pertain to innovation and startup growth. To give you a sense of what Mr. Garneau’s position is, you can look at the transcript of his speech to the Economic Club of Canada.

Related Story – Marc Garneau: startup investment must be rewarded

In that speech he says the following about productivity and innovation, which was also discussed in his talk:

“To begin, let me address my first point, the issue dearest to my heart — Canada’s long-standing innovation challenge.

For too long we have failed on this front. And, please allow me to be blunt. Part of this failure, I am sorry to say, lies within this room — the financial-business sector.

It doesn’t come as a surprise for me to say that Canada is great at coming up with ideas but poor at commercialization.

While Canada’s governments invest in R&D comparably with the rest of the world, our businesses do not…

While I will not pan more government funding for R&D and industrial innovation, I will say we need a more targeted approach. We need to take bold and sustained action — No more half measures.

Instead of government money crowding out private investment, I think you will agree that we must entice and reward private investment in innovation.

Here is what I propose: Instead of more government handouts, let’s eliminate all capital gains tax on investments in Canadian start-ups; let’s introduce an angel investor tax credit to help entrepreneurs bridge the gap between ideas and the market.”

On the one hand it is refreshing to have innovation at the forefront of a political policy, even if what is being said is nothing new. It is well known that our productivity is lower than the USA. It is also well known in the startup community that our Venture Capitalists (VCs) are risk averse. It is also a fact that there is less VC capital available in Canada than in the US. I am not saying there is no capital, but there is less. As such, these VCs can be pickier in who they invest in. Often seeking out startups that have demonstrated success. The result is little funding available for early stage startups.

So, by eliminating the capital gains tax on investments, or introducing an angel investor tax credit, will the government be able to change the risk profile of investors in Canada and encourage angel investors to invest more.

What Mr. Garneau has not stated explicitly, but has certainly implied, is that private sector people are better at determining who should receive investments.

Related Story – Is Marc Garneau’s idea to boost startups just a tax cut for the rich?

In my mind, it is unlikely that Mr. Garneau’s plan will actually achieve his stated goal. For one, there are already incentives available to Angel Investors in Canada. I don’t believe this has encouraged Angel Investors to invest more money or changed their risk profile as investors. It is also highly improbable that this will encourage non-investors to become angels. And I definitely don’t believe that this will address the gap at the early stage startup phase, where the capital is most lacking.

Investor behavior is just a small piece of the problem facing Canadian startups. The corporate culture of Canada of being risk averse, and not investing as much in research & development also impacts on Canadian tech startups greatly. Mr. Garneau mentioned that only two per cent of our GDP was for R&D versus a country like Israel where the percentage of GDP is 4.6 per cent. Of the two per cent GDP in Canada, most is public sector investment.

We need private sector investment. For that to happen we need to move from being a country that is hesitant to invest and take risks, to one that encourages such behaviour. If not, we will continue to see our brightest and most talented move to the US, where there is more willingness to embrace our startups.

Monica Goyal
Monica Goyal
Monica Goyal, Entrepreneur, Lawyer and Innovator is the founder of Aluvion, a legal solutions company offering technology, paralegal and lawyer-driven solutions with a special focus on the quality, cost, and accessibility of legal services for both businesses and individuals. Monica began her career working as an engineer in R&D for companies like Toshiba, Nortel and Nokia while earning her Masters of Engineering at Stanford. Monica's history conditioned her to solve problems in a efficient and tech-savvy manner, an approach she brings with her to legal solutions. Monica currently sits on the Canadian Bar Association's Futures Initiative, and will be teaching a course on Legal Technology at York University’s Osgoode Hall. She was recently named one of 10 Women to Watch in Tech in the Journal of the American Bar Association.

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