CVCA calls for temporary capital gains reduction, national investment tax credit in pitch to federal parties

With a federal election weeks away, the Canadian Venture Capital and Private Equity Association (CVCA) has published a white paper pushing policy recommendations aimed at incentivizing domestic investment.

Among its five recommendations, the document calls on Canada’s next federal government to temporarily slash the capital gains tax inclusion rate from 50 percent to 25 percent for investments in Canadian startups and scaleups, and double the Lifetime Capital Gains Exemption (LCGE) limit from $1.25 million CAD to $2.5 million. The CVCA is asking for both of these measures to be introduced over the next three to five years.

The CVCA has also called for the introduction of a new federal tax credit for investments in Canadian small businesses, modelled on existing provincial incentives. The association and lobbying organization believes these measures will help ensure “Canada remains competitive in an increasingly challenging global landscape” and help address some of the country’s productivity challenges.

“Our hope is that both parties will look at these recommendations and adopt some of them.”

Kim Furlong, CVCA

In an interview with BetaKit, CVCA CEO Kim Furlong noted that the paper’s recommendations fall into three categories: supporting risk-taking through targeted capital gains taxation changes, ensuring that the flow of capital to venture capital (VC) continues to grow and diversify, and stimulating business investment in research and development (R&D).

The CVCA’s other asks include for the new government to follow through on recapitalizing the Venture Capital Catalyst Initiative (VCCI) and reforming the Scientific Research and Experimental Development (SR&ED) tax credit program, explore encouraging Canadian pension funds to invest more domestically, and fully reinstate the Accelerated Investment Incentive, which is currently being phased out.

It began this work last year after Conservative leader Pierre Polievre said that, if elected, he would put together a group to provide recommendations on taxation. Furlong said she was pleased to see the Liberals backtrack under Mark Carney’s leadership and Polievre’s Conservatives take a stand against the proposed capital gains inclusion rate hike, something the CVCA had been fighting since the Liberals introduced the tax changes in Budget 2024. “Our hope is that both parties will look at these recommendations and adopt some of them,” Furlong said.

The CVCA hopes both parties will go further by temporarily halving the capital gains tax inclusion rate, which Furlong said would put the real rate of taxation around 13 percent and make Canada more competitive with parts of the US, and doubling the LCGE for eligible investments.

Furlong said the CVCA is asking for the feds to do this over the next five years and then measure its impact. “Don’t do it forever,” she said. “Do it because of the circumstances under which we find ourselves.”

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Furlong noted that the CVCA has included calls for an investment tax credit in its federal pre-budget submissions for the last few years and believes that the timing is right for the feds to implement such a measure.

“We just believe that at a time where governments, provincially and federally, will be looking at [inter-provincial] barriers to trade, this is a right moment to add that capital flow writ large through Canada,” Furlong said.

Furlong said she does not think the federal government should tell Canada’s large pension funds what to do or tinker with their mandates, but believes it could and should find ways to incentivize them to invest more in Canada, such as through a fund-of-funds model like VCCI or what Caisse de dépôt et placement du Québec does with Teralys Capital.

“We do think that the conversation is right, given what we’re seeing geopolitically and how every country will have to imagine how they support their own domestic economies,” she said.

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Furlong also noted that SR&ED still needs a revamp. “It is what we’ve been talking about for the last 20 years,” Furlong said, noting that the government has already done some work on this. “CVCA had put in some recommendations, so we reiterated those.”

Politically speaking, a lot has changed since the Government of Canada announced a new $1-billion round of funding for VCCI and $1 billion for mid-cap growth companies in its Fall Economic Statement last year. Furlong noted that this has meant both commitments will need to be reintroduced. The CVCA is advocating for the new government to follow through.

As to how confident she is that this will happen, Furlong noted, “it’s too early to say,” but added that the CVCA “will continue to make the case that they should.”

Feature image courtesy the CVCA.