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The federal government announced its budget last Thursday. It was promoted as entrepreneur friendly, and it appears it delivered. We have thoughts on the whole budget, but we’ll focus on the changes that matter to the tech community.
The big change
The government introduced a US Qualified Small Business Stock (QSBS)-like capital gains exemption for Canadian companies called the Canada Growth Incentive (Capital Gains Exemption).
If you invest in a qualifying Canadian company that operates in Canada and has $100M CAD or less in assets, and you hold the shares for 36 months, the first $15M CAD of capital gains is taxed at roughly 4% when you sell, instead of roughly 29%. This is per entity you invest in.
Previously, gains counted against a lifetime exemption limit, and anything above it was taxed at the normal capital gains rate.
Why it matters
Other than reducing capital gains taxes on individual investments? It brings us to par with what the US offers investors. One reason why more investors in the US invest in venture funds and startups is because of the favourable tax treatment.
It is also one of the supposed reasons for Canadian founders to move to the US to start their companies (easier to raise and better tax treatment). The hope is that this removes one barrier to capital formation in Canada.
Things to note
This incentive explicitly excludes professional practices, skill-based businesses, real estate, financial/banking services, agriculture, forestry, hospitality, and franchised/licensed operations. The idea is to help stimulate investment in technology and productivity.
Shares issued before budget day (November 5, 2026) do not qualify, and neither do shares issued after 2036. If this proves useful, the end date will be extended.
There may be a loophole for Simple Agreements for Future Equity (SAFEs). The issuance date of the shares determines when they are eligible, but the hold period starts the day the SAFE was signed. So if a SAFE was signed earlier this year but converted to shares in two years, they count, and the hold period starts earlier.
There is also a capital gains incentive to roll your investment back into the same asset class to avoid paying taxes. The government extended the period in which you can roll over your investment, which complements this nicely.
Our take
This is a huge win, but it will take time to show results.
Investors will now have more incentive to invest in Canadian venture, but it takes time to shift allocation. Most investors are not sitting on a ton of cash. They have to liquidate assets and choose to invest in venture.
As investors, founders, and employees cash out of exits, many will want to reinvest in venture, the asset class that made them money, and that reinvestment compounds over time.
We don’t expect a sudden spike in investment. We expect funding to rise gradually over the next few years, and by 2033 the compounded effect is large.
Other changes
Scientific Research and Experimental Development (SR&ED) expansion: SR&ED has been proposed to include activities required to commercialize the research. The government realizes that once you create technology, you have to invest in monetizing it.
Our take: It’s a great move. We want to see how it’s implemented and audited, as it’ll help deep tech companies and university spinouts. The expansion is needed because investment in traditional software keeps shrinking.
BDC and EDC merger: The government announced it will merge the Business Development Bank of Canada (BDC) and Export Development Canada (EDC) into a single federal development bank.
Our take: It’s too early to have an opinion.
500 MW of sovereign AI compute: The budget plans to give Canadian AI firms financial backstops and offtake agreements to access 500 MW of compute capacity within Canadian data centres, reducing reliance on foreign hyperscalers.
Our take: It’s always good to see more compute available. Backstops and offtake agreements give data centre builders a committed buyer, which should encourage more Canadian data centres to be built.”
Government Transformation Fund: About $1B CAD over five years will go toward helping the federal public sector adopt AI and other IT. If a meaningful share goes to outside vendors, it could open a large new procurement opportunity for enterprise tech startups.
Our take: We’re excited about this reducing red tape and cost of government, and the opportunities for startups.
Technology Stability Board: The government is exploring the option to create a new body to assess advanced AI model safety and human control oversight.
Our take: If Canadian AI companies have to get their models assessed, that adds red tape for startups. We’d want to see how light the process is.
The Productivity Mega Deduction: A permanent measure that allows businesses to immediately write off capital assets like advanced machinery, equipment, and software, dropping Canada's marginal effective tax rate on new investment from 13% to 6.4%.
Defence tech boom: Tied to Canada’s goal of meeting its NATO spending commitment, the budget sets aside $2.3B CAD over five years, starting in 2027-28, for a Defence Drone Initiative. It also directs up to $2.7B CAD over five years, drawn from previously announced funding, toward defence industrial priorities that include quantum, aerospace, and space.
Our take: This is great for the defence tech industry in Canada, but it is unclear how this builds globally competitive companies.
Cleantech extensions: The Clean Technology and Clean Electricity investment tax credits (ITCs) have officially been proposed to the end of 2040.
Which part of this budget affects your company most? Hit reply and let us know.
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