Tech startups urge Ottawa not to raise taxes on stock options

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A group of leading Canadian tech entrepreneurs has told the Liberal government they need help recruiting top foreign talent and finding customers – not handouts – if they are to replace BlackBerry and Nortel Networks as Canadian-based tech giants. Their first ask: that the government back down on an election pledge to increase taxation of stock options.

Fast-growing startups "are in a war for talent and we need to focus on policies that will help us find the people," said John Ruffolo, head of the venture capital arm of pension giant OMERS and co-founder of the Council of Canadian Innovators (CCI).

On Dec. 21, the CCI – comprised of leaders of 35 prominent startups including Shopify, Hootsuite and Wattpad and chaired by former Research in Motion co-CEO Jim Balsillie – met in Toronto with three Trudeau government cabinet ministers, Navdeep Bains (innovation, science and economic development), Chrystia Freeland (trade), and Bardish Chagger (small business and tourism), and top bureaucrats. Their intent was to establish a relationship between Ottawa and the startup sector for the first time, and lay out how they think government can best help foster domestic tech champions. "This was a good first meeting and we hope for more that leads to improved results in terms of innovation," Mr. Bains said through a spokesperson.

The CCI is hoping to influence the government's innovation agenda at a time when the tech sector has emerged as one of the few bright spots in the country's sluggish, resources-dependent economy. Mr. Balsillie and Mr. Ruffolo mobilized the CCI's charter members to join forces after telling them at a private gathering this fall that global tech giants do a far better job lobbying Ottawa than startups do, implying they risk being left behind when governments set policies.

At the meeting last week, Mr. Balsillie encouraged the government to move past decades of innovation policies strongly tilted toward giving out money, which he argued has resulted in "more costly inputs and very lousy outputs," according to notes from his presentation. He urged the government to forge intimate ties to the country's domestic tech stars, as is commonplace in other countries including the United States. "We are not asking for special treatment, preferential access or any favours," he said. "To be perfectly frank, we are aiming to have the same relationship that these foreign companies have already with our own Canadian government."

In an interview, Mr. Ruffolo said he told the meeting that government had done a "very good job" financing startups. "Personally, I do not think Canada has a starting-up problem, we have a finishing-up problem." He said Ottawa needed to do a far better job helping local tech companies improve their access to customers through global trade agreements, standards setting and intellectual property legislation. Federal procurement policies also make it harder for Canadian startups to sell to Ottawa than is the case for startups in other markets.

Allen Lau, CEO of Wattpad, a Toronto-based online platform for authors and readers, said successful Canadian startups struggle when trying to recruit foreign executives due to cumbersome Canadian immigration policies. Hiring a foreign executive can take longer than a year, including months spent proving nobody else in Canada can do the job. Instead of waiting, many targeted employees – typically successful Silicon Valley executives in high demand – choose competing offers, putting Canadian recruiters at a disadvantage. "We are racing against time," Mr. Lau said. "Taking one year or more is almost a non-starter."

But CCI members zeroed in at the meeting on a pledge by the government to fully tax individual stock-options gains exceeding $100,000.

The Liberals promised to target wealthy executives punitively as part of their middle class-focused election platform. But for startups, options represent something different than a tool to enrich well-compensated blue-chip executives. Stock options carry the promise of a future windfall should capital-starved startups defy the odds and succeed, to compensate for lower salaries and the higher employment risks. "Stock options are a big part of the startup conversation," Mr. Lau said. "We use options as part of the package to attract talent….With our currency falling, attracting talent to Canada is becoming much more difficult if we also lose the options as a very powerful tool."

Michael Hyatt, chairman of Toronto-based information technology security firm BlueCat, added: "If you make stock options undesirable, no one will come here."

CCI members said they were pleased by the response from the ministers at the meeting. "I was taken aback by how much they wanted to help," Mr. Hyatt said. "We all left feeling pretty optimistic."

Ms. Freeland said in an interview her government is "very supportive [of] the importance of innovation to the Canadian economy, and that's something we're working on, on a number of fronts.… I think it is really valuable to have a group of business leaders who have come together to advocate for these issues and to work with us on them. "

But she indicated it was too early to tell how the government would respond on the stock-option issue, given that Finance Minister Bill Morneau has yet to kick off pre-budget consultations. "It's fair to say right now when it comes to specific proposals, all of the government [and caucus] is very much in consultation when it comes to the budget," she said.