Canada Tech Startups Winners as Morneau Backs Off Options Plan

Updated on
  • Morneau says no plans to raise tax rate on stock options
  • Canada budget also offers incentives for technology research

Canada’s technology sector spoke and the government listened.

Finance Minister Bill Morneau backed off on plans to raise the tax rates on stock options, which would have been a setback for tech startups that rely on options to attract and compensate employees before the firms are generating large revenue.

“As I was out on pre-budget consultations, I heard from many small firms and innovators that they use stock options as a legitimate form of compensation for their employees, so we decided not to put that in our budget,’’ Morneau told reporters Tuesday in Ottawa. The government has no current plans to increase the tax in later budgets, he said.

Both the Liberal and New Democratic parties campaigned in the 2015 election on raising the tax on stock options, which they said were being used by executives at big companies to avoid income tax. The Liberals considered raising the exemption rate beyond 50 percent on options worth more than C$100,000 ($76,000). They’d also pledged to impose the revised tax rate only on new options.

Paid Off

Canadian tech entrepreneurs and investors decried the plan, saying it would make it harder for them to recruit top talent, who are enticed to join risky, early-stage companies with the promise of stock options that may provide a big pay out when the company gets sold or goes public.

Startups and venture capitalists rallied around the issue, forming a lobby group and meeting with politicians to press their case. Their efforts paid off.

Tobi Lutke, CEO of Ottawa-based Shopify Inc., said in an e-mail he was “thrilled” with the government’s decision.

Stock options are an “essential tool” for tech startups trying to grow into globally competitive companies, John Ruffolo, CEO of OMERS Ventures, the venture capital arm of the Ontario Municipal Employees Retirement System, said in an e-mail.

Ruffolo helped form the lobby group representing high-growth startups, along with former BlackBerry Ltd. co-CEO Jim Balsillie. Ruffolo said he welcomed the government’s decision to not increase the tax.

“Executives at companies that receive options are breathing a sigh of relief today,” said Kash Pashootan, a fund manager at First Avenue Advisory of Raymond James Ltd. in Ottawa, whose firm manages about C$230 million

Renewed Attention

Trudeau has made technology and innovation a key part of his vision for Canada’s economy. Just weeks after being elected he told delegates at the Davos conference that Canada wanted to be known for its resourcefulness, not just its resources. With commodity prices in a rut and unemployment in oil-rich Alberta soaring, technology companies are getting renewed attention from economists and politicians.

The budget includes C$800 million in spending over the next five years on an “innovation agenda,’’ details of which the government will announce over the next few months. The government specifically mentions “high-impact firms” that need to “scale up,” in the budget, code words for fast-growing, venture capital-funded companies like Hootsuite Media Inc. and Kik Interactive Inc.

The Liberals plan to build a concierge-like service to help high-growth startups navigate the different benefits and services the government offers to help companies get funding, take advantage of research support and export their products to other countries.

Universities and researchers are also getting a boost, with a C$2 billion fund to upgrade buildings and labs at the country’s post-secondary institutions. The budget spells out that tech incubators on university campuses would qualify for that funding. The Perimeter Institute, based in BlackBerry’s hometown of Waterloo, Ontario, will get C$50 million over the next five years to fund its work on quantum physics research.

“Innovation is today’s driver of inclusive growth,’’ reads the introduction to the section on technology spending. “Canada must be in it to win.’’

Small tech firms may also get more access to capital as a result of the budget. The government plans to restore the 15 percent tax credit for labor-sponsored venture capital corporations, or union-backed pools of capital that back startups. The move will offer C$815 million in tax relief over five years, according to the budget.

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