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federal election 2015

NDP Leader Thomas Mulcair.ADRIAN WYLD/The Canadian Press

New Democratic Party leader Tom Mulcair has partially backed down on his election promise to change the tax treatment for stock options after some of Canada's leading technology entrepreneurs warned it would kill the country's burgeoning startup ecosystem, one of the bright spots of a sluggish economy.

In a letter Friday to Ryan Holmes, CEO of Vancouver-based social media management firm Hootsuite Media Inc. and Tobi Lutke, CEO of Ottawa-based retail software firm Shopify Inc., Mr. Mulcair clarified that his party's plans to fully tax gains by senior corporate executives from exercising stock options "excludes options granted by early stage companies." Mr. Mulcair added, "We will work with technology industry leaders to establish fair guidelines that protect these companies and their employees and support entrepreneurship and innovation."

Mr. Mulcair has portrayed the use of options as a ploy by wealthy corporate executives to exploit a loophole and avoid paying income tax. His party estimates the government would save $500-million a year for the next four years by taxing the full gain on options. Currently, only 50 per cent of the gains from stock options are subject to tax, which is the same favourable capital gains tax rate that investors pay when they sell shares.

But Mr. Holmes and Mr. Lutke, leaders of two of Canada's most successful emerging tech companies, on Thursday told The Globe and Mail that the NDP's plans would harm the country's startup ecosystem. They said options are vital for young tech companies that need to attract employees and are challenged by a lack of money and a much greater risk of failure than established firms. Employees accept lower pay and greater risk in the hopes that the stock options they receive could translate into valuable equity down the line. The CEOs said by fully taxing options gains, it would be harder to recruit employees, and that neither of their companies could have achieved their current success, including the ability to hire hundreds of employees each, if such a regime had been in place.

In his letter, Mr. Mulcair thanked the two for the points they raised in The Globe story, and promised the party would "work with leaders in the tech and innovation sector to ensure the success of the next generation of Canadian start-ups."

Mr. Lutke said in an interview Friday, he was "very impressed with the swiftness of the response and by how [the NDP] engaged on this issue. I think this is a very good sign the formation of startups is an issue that has made it into campaign offices."

So far, the federal party leaders have had little to say during this election campaign on the so-called "innovation economy," which has been a preoccupation of past political and policy leaders keen to diversify Canada's economy. Widespread technological disruption, by contrast, has been a bigger issue south of the border, where Democratic presidential candidate Hillary Clinton has raised concerns about the impact of disruptive technology companies such as Uber and AirBnB on the workforce, while other candidates, notably Republican Jeb Bush, have actively courted the Silicon Valley vote by praising the tech sector as the creator of the jobs of tomorrow.

Canada's venture capital sector has been an economic success story, attracting high levels of financing even as the economy faces volatility and stock markets have slumped. In the first half of 2015, completed venture capital deals totalled $939-million, up 23 per cent over the same period last year, according to the Canadian Venture Capital & Private Equity Association.

Meanwhile, another election promise by the NDP is still sending negative ripples through the startup community: a promise to restore tax credits for labour-sponsored venture funds, a policy tool of past governments that policy experts say resulted in a squandering of government funds with no meaningful creation of jobs or investment returns.