Via email: consultation-legislation@fin.gc.ca
On behalf of its 230 member companies and Canada’s biotech industry more broadly, BIOTECanada is writing to provide its perspectives in the context of the government’s consultation pertaining to the implementation of the federal budget’s capital gains tax increase measure.
The capital gains tax rate increase will significantly undermine the competitiveness of early-stage, pre-commercial biotech companies for whom stock options represent a vital compensation tool which allows them to attract and retain top talent needed to drive innovation forward. Importantly, the proposed increase will negatively impact companies at a critical time as the sector is experiencing a period of growth due to an increased availability of investment globally and the deployment of the government’s Biomanufacturing and Life Sciences strategy with its corresponding investments. In this context, BIOTECanada strongly urges the government to maintain the existing rate for Canadian biotech companies and those in other similar innovation sectors comprised of early stage/pre-commercial companies.
Early-stage biotechnology companies require time, investment capital, and highly specialized scientific talent to move an innovation from the lab to commercial applications. The lengthy timelines, significant R&D expense, and regulatory oversight requires early-stage companies to manage their investment capital prudently and effectively. To effectively deploy investment capital, attract top talent, and reward the risk they assume by joining a start-up, companies often employ a hybrid compensation model which combines a base salary with ownership shares in the company. The proposed capital gains increase will significantly undermine the attractiveness and practicality of this important compensation model and will correspondingly render Canadian companies less competitive when trying to attract and retain talent.
Importantly, this proposed increase comes at a critical time for the biotech sector. The pandemic’s economic, social, and health impacts effectively focused the attention of policymakers on the strategic importance of building a competitive domestic life science and biomanufacturing industry. Learning from the pandemic experience, the Canadian government has been prudently preparing for another similar global health emergency through the implementation of a Life Sciences and Biomanufacturing Strategy which includes significant government investment into augmenting Canada’s life sciences and biomanufacturing capacity.
It is important to recognize that following the pandemic, other nations are equally aware of the biotech sector’s strategic value and like Canada, they too are investing in building their domestic capacity. To meet their domestic objectives, other countries are aggressively competing to attract investors, talent, and even companies away from Canada. Investment and talent are global tourists which will gravitate to the jurisdictions where they are most valued and rewarded. In this context, it is imperative Canada avoid measures that will reduce its competitiveness with respect to attracting companies, talent, and investment.
The government’s initiatives to enhance the SR&ED credit, develop a patent box mechanism, and mobilize pension funds, are timely and important. The proposed capital gains tax rate increase will lessen the impact of these initiatives and undermine the ability of companies to attract talent which will in turn slow the sector’s momentum more broadly. The increase will also negatively impact the effectiveness of the investments the government itself has made in relation to the Biomanufacturing and Life Sciences Strategy.
With the strategies and corresponding investments designed to drive Canadian innovation sectors such as biotech, AI, clean tech, and biomanufacturing, the government has signaled it understands the importance of the innovation sectors to the country’s long term economic competitiveness. The proposed capital gains tax increase will significantly undermine the government’s own investments and strategies aimed at driving the growth of Canada’s innovation sectors. With several Canadian biotech companies currently experiencing significant growth and success, now is a critical time to add stickiness to those companies with momentum to encourage them to stay in Canada, continue to scale up, and ultimately anchor biotech clusters.
The proposed capital gains tax rate increase will impede company growth, make Canada less attractive for investors, and will push existing high value companies to other jurisdictions with more competitive tax environments. Given the sector’s current momentum, now is not the time to undermine its competitiveness. In this context, the industry strongly recommends the government apply company size and revenue thresholds to exempt specific sectors from the capital gains increase.
Sincerely,
Andrew Casey
President & CEO