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In a crucial moment for Canada’s burgeoning tech sector, the need for a robust investment framework has never been more pressing. Recent claims by Garry Tan, president of Y Combinator, suggest that Canadian startups may significantly enhance their capital access by reincorporating in the United States. This revelation, initially leading Y Combinator to halt investments in Canadian firms, underscores a broader concern regarding the availability of funding within Canada’s innovation ecosystem. As venture capital flows increasingly favour American firms, the Canadian government must explore proven strategies from abroad to retain its entrepreneurial talent and stimulate economic growth.
The Capital Crisis in Canada
The stark contrast in venture capital activity between Canada and the United States highlights an alarming trend. In early January, Silicon Valley’s Andreessen Horowitz (a16z) announced the successful raising of a staggering US$15 billion across five new funds. To put this into perspective, this amount is more than seven times greater than the total US$2.1 billion raised by all Canadian venture-capital firms throughout 2025. Such figures paint a vivid picture of the capital drought facing Canadian startups, with only 32.4 per cent of Canadian-founded startups that secured $1 million in funding being incorporated in Canada.
The ramifications of this capital shortage are grave, affecting job creation, tax revenue, and the ownership of intellectual property. As more companies seek better funding opportunities south of the border, Canada risks losing its innovative edge and the very talent that drives its economy.
Learning from the UK: SEIS and EIS
To counter this trend, Canadian policymakers should consider adopting frameworks such as the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS), which have significantly boosted the UK’s startup ecosystem since their inception in 2012. These programmes have facilitated over $63 billion in private capital investment across 59,000 startups, leading to the creation of 386,000 jobs and generating $50 billion in annual revenue.
The success of SEIS and EIS lies in their ability to attract investors through tax incentives. These schemes offer three principal benefits: income tax credits for investments in startups, the ability to offset losses against income, and exemption from capital gains tax on shares acquired through the schemes. If a similar model were implemented in Canada, it could dramatically alter the landscape for investors.
For instance, an Ontario investor making a $100,000 investment in a pre-seed startup could receive an immediate tax credit of $50,000. Should the startup fail, the remaining amount could be deducted from the investor’s taxable income, effectively lowering their risk to approximately $23,000 while maintaining the potential for significant returns, bolstered by the capital gains exemption.
Unlocking Dormant Wealth for Innovation
Canadians currently hold an estimated $470 billion in Guaranteed Investment Certificates (GICs) and about $8.5 trillion in real estate. While these investments provide stability, they often limit potential gains and do not contribute to the growth of the innovation sector. By instituting tax incentives that make startup investments more appealing, Canada could encourage professionals—doctors, lawyers, engineers—to redeploy a fraction of their wealth into angel investments.
If just 0.1 per cent of this dormant wealth were channelled towards startups, it could unlock an impressive $9 billion in additional funding for the innovation ecosystem, quadrupling the capital raised by the entire venture-capital sector last year. This influx of cash would not only provide essential funding but also attract seasoned professionals to the innovation landscape, creating a cycle of mentorship and investment that bolsters the next generation of entrepreneurs.
The Need for Action
The disparity in capital availability between Canada and the United States is a critical issue that demands immediate attention. The Canadian government, recognising the urgency of the situation, must take proactive steps to ensure that the nation’s best ideas and talent do not migrate southward. Minister of AI and Digital Innovation, Evan Solomon, has expressed a commitment to fostering Canadian innovation, but executing a strategy akin to the UK’s SEIS and EIS could be the key to achieving these goals.
The success of Canada’s innovation ecosystem hinges on the ability to retain and attract investment. With American venture capital accounting for 58 per cent of the funding landscape in Canada, the question is no longer if the country can afford to adopt a similar approach to the UK, but rather if it can afford not to.
Why it Matters
Canada stands at a crossroads, facing a critical challenge in keeping its innovative spirit alive amidst an exodus of talent and capital. By implementing targeted investment incentives, the nation can create an environment that not only fosters entrepreneurship but also builds a self-reinforcing cycle of mentorship and investment. This is not just about retaining startups; it is about securing the economic future of Canada and ensuring that it remains a competitive player on the global stage. The time for decisive action is now.
