Canada’s startup ecosystem is grappling with a significant capital shortfall, forcing many fledgling companies to consider reincorporating in the United States for greater funding opportunities. This shift, highlighted by Garry Tan, president of renowned accelerator Y Combinator, underscores the urgent need for a strategic overhaul of investment incentives in the country. With venture capital activity in Canada lagging dramatically behind that of Silicon Valley, experts are advocating for a model inspired by the United Kingdom’s successful investment schemes.
The Capital Dilemma
Tan’s assertion that Canadian startups could double their access to capital by shifting to U.S. incorporation has raised eyebrows and sparked debate within the Canadian tech community. While Y Combinator’s initial decision to halt investments in Canadian firms was met with backlash, the underlying concern about capital availability remains pressing. A stark comparison reveals that Silicon Valley’s Andreessen Horowitz recently raised $15 billion across five new funds, while Canadian venture-capital firms collectively secured only $2.1 billion throughout 2025. This staggering disparity highlights the urgent need for Canada to reassess its investment landscape.
Recent data indicates that a mere 32.4% of startups founded by Canadians and raising at least $1 million were incorporated in Canada. This trend poses a tangible threat to job creation, tax revenue, and the ownership of intellectual property, all of which risk being siphoned off to the United States.
Learning from the UK: SEIS and EIS
To address this dire situation, Ottawa is encouraged to adopt frameworks similar to the United Kingdom’s Seed Enterprise Investment Scheme (SEIS) and Enterprise Investment Scheme (EIS). Launched in 2012, these initiatives have proven effective in mobilising private capital, amassing over $63 billion for 59,000 innovative startups. According to recent figures, these startups have been pivotal in generating 386,000 jobs and contributing $50 billion in annual revenue.
The success of SEIS and EIS is largely attributed to the tax incentives they offer. These include income tax credits for investors in innovative startups, the ability to offset investment losses against income, and exemptions from capital-gains tax on shares purchased through these schemes. If Canada were to implement a similar model, the potential for revitalising its startup ecosystem could be substantial.
De-risking Investments for Canadians
By applying the SEIS framework, Canadian investors could see immediate benefits. For example, a $100,000 investment in a pre-seed startup could yield a $50,000 tax credit upfront. Should the investment falter, investors could offset the remaining $50,000 against their income, resulting in an additional tax benefit of approximately $27,000 at the highest marginal tax rate. This means that the effective risk for an investor writing a $100,000 cheque could be reduced to around $23,000, while the upside remains attractive due to capital-gains tax exemptions.
Currently, Canadians have an estimated $470 billion tied up in Guaranteed Investment Certificates (GICs) and an additional $8.5 trillion in real estate. While these assets provide stability, they also curb the potential for high-reward investments. By introducing tax incentives that make startup investments more appealing, Canada could encourage professionals, including doctors, lawyers, and engineers, to become angel investors in innovative ventures. Just a 0.1% reallocation of this dormant wealth could unlock an additional $9 billion for the Canadian innovation ecosystem—four and a half times the total raised by the venture-capital industry last year.
Building a Sustainable Innovation Ecosystem
Beyond merely increasing capital, these incentives could attract seasoned professionals into the innovation space. One of the hallmarks of thriving tech hubs like San Francisco is the active participation of successful entrepreneurs who not only provide funding but also share their expertise with emerging founders. This creates a virtuous cycle of mentorship and investment that fosters a self-sustaining ecosystem.
The SEIS and EIS models illustrate how a mid-sized economy can effectively bolster its innovation landscape. Although Canada may not possess the financial clout of the U.S., implementing the right incentives could galvanise citizens to support local startups, ultimately driving economic growth through active investments rather than passively sheltering wealth in savings or real estate.
Why it Matters
The current state of Canada’s innovation ecosystem does not align with the potential of its entrepreneurs. As Minister of AI and Digital Innovation Evan Solomon emphasises, it is imperative for Canadian innovation to thrive domestically rather than being siphoned off to the U.S. The U.K.’s SEIS and EIS provide a compelling blueprint for fostering job creation and economic growth without necessitating vast public expenditure. If Canada continues to allow American investors—who currently account for 58% of venture capital in the country—to dominate, the pressing question will not be whether the country can afford to pursue these reforms, but rather whether it can afford to ignore them any longer.